Closed-end funds are institutional investors that, for a pre-defined term, invest in assets whose financing exceeds the capacity of an individual investor or for which an individual investor cannot be found on account of the risk characteristics.1 The issue volume is limited to the production or investment cost of the asset or assets and is fixed at the time of issue. After reaching the predetermined investment volume, the fund is closed to other investors. Except for in what are known as “blind pools”, the investment properties are usually known in advance and are not interchangeable. The fund initiator can therefore produce an investment and financing plan in advance.2
Closed-end funds are usually sold by the issuer itself or by banks that have access to the respective investor market. Potential investors include wealthy individuals willing to invest a larger amount (usually at least EUR 5,000) for a long period (10-30 years) without having to access the capital invested during this time. Furthermore, investors should study the investment properties or sector as, in addition to its management, the performance of the fund is primarily dependent on the investment property itself.
The goal for investors is an attractive return. In the past, closed-end funds were often subscribed to for tax incentives, though these largely now no longer exist.
An investment in closed-end funds is illiquid for investors as the fund units are not traded on a public market.3
Unlike most other types of investment, the investor does not acquire securities in a closed-end fund, and instead acts as a partner in a company. Typically, this will be a limited partnership (KG) or GmbH & Co. KG, in which the investor is a limited partner. Companies constituted under civil law (GbR) are also possible. However, this form is only rarely chosen owing to the liability risks to partners.4
Until a few years ago, closed-end funds were largely unregulated. Now issuers of closed-end funds have to apply to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin – German Federal Financial Supervisory Authority) for an AIFM license. To obtain this license, the issuer – as an asset management company – must meet certain requirements. In addition, closed-end funds are controlled at many levels by a so-called depositary. Among other things, over the entire term of the fund, this checks whether the cash flows of the fund are correct. Under the AIFM Directive, the German Investment Code introduced greater regulation for closed-end funds, making them safer for private investors.5
Closed-end funds can invest in different asset classes. Usual candidates include property, ships, aircraft, wind or solar farms, forest land, agricultural land and many others. Furthermore, there are closed-end private equity funds that acquire shares in unlisted companies. Also, special funds that invest in art or wine can be issued in principle, but are rather rare in practice.6
After investing in a closed-end fund, investors can only sell their units on the so-called secondary market before the fund is broken up. This is a non-regulated market that is also relatively small.