Open-ended vs. closed-end funds: Understanding the mechanics

When you first encounter private markets, one of the earliest choices you’ll face is which strategy to invest in, e.g. private equity, venture capital, private credit, etc. Meanwhile, an equally important – and at times overlooked – distinction is the kind of fund structure you’re investing through. The two dominant structures are closed-end funds and open-ended (or “evergreen”) funds. They invest in similar assets, but they work very differently in practice. 

Understanding the distinction matters. It shapes how your capital is deployed, how long it stays invested, and when — and how — you can access your money. In this article, we take a closer look at how each structure works, where they differ in practice, and what that means for the way you build a private markets allocation.   

The closed-end fund: the original private markets model 

The closed-end fund is the structure that built private markets as we know them. Virtually every buyout fund, venture capital fund, and infrastructure fund raised over the past four decades has used this model. 

Here’s how it works. A fund manager — the general partner (GP) — raises a fixed pool of capital from investors — the limited partners (LPs) — during a defined fundraising period. Once that period closes, no new investors can enter. The capital is then drawn down gradually as the manager finds and executes deals, typically over a three-to-five-year investment period. 

The fund has a fixed lifespan — usually ten years, sometimes extended by a year or two. Over that time, the manager buys, builds, and eventually sells portfolio companies, returning the proceeds to LPs as exits occur. At the end of the fund’s life, it winds down entirely. 

The defining characteristic of a closed-end fund is its illiquidity. Once you commit capital, you are broadly locked in until the fund returns money through distributions. You cannot simply ask for your money back. Secondary markets exist — where you can sell your fund interest to another buyer — but that route comes with its own complexity and typically a discount to NAV. 

There is also a pattern of returns known as the J-curve. In the early years of a closed-end fund, returns often dip negative as management fees are charged before investments have had time to mature.  

Performance typically builds through the middle years as portfolio companies grow, with the strongest returns crystallising at exit. This means patience is not just advisable — it is structural. 

The open-ended fund: A newer model for private markets 

Open-ended funds — also called evergreen funds or perpetual vehicles — take a different approach. Rather than raising a fixed pool of capital and winding down after ten years, an evergreen fund is designed to run indefinitely. 

Investors can subscribe — that is, invest new money — at regular intervals, typically quarterly. The fund continuously deploys capital into new investments and recycles proceeds from exits back into the portfolio rather than distributing them. This means the fund is always invested, continuously growing, and never starts from scratch with a new vintage. 

Liquidity is available, but it is limited and conditional. Most evergreen funds offer periodic redemption windows — again, typically quarterly — but the amount that can be redeemed at any one time is capped, usually at around 5% of NAV per quarter. If redemption requests exceed that limit, they may be queued or gated.  

The fund manager actively manages a liquidity buffer — a portion of assets held in more liquid form — to meet expected redemptions without being forced to sell private assets at the wrong time. 

This is an important distinction. While evergreens are occasionally referred to as ‘semi-liquids’, they are still illiquid by nature. The evergreen structure introduces a mechanism for accessing capital periodically — but it does not change the fundamental nature of what is owned inside the fund. 

Which structure suits which investor? 

Neither structure is universally superior. The right choice depends on your circumstances, objectives, and how you think about liquidity. 

Closed-end funds tend to suit investors who can make a long, fixed commitment and are comfortable with the J-curve. They offer full vintage-year exposure — if you invest in a fund raised in 2020, your performance is tied to deals done in the 2020–2025 window. This can work strongly in your favour if the timing is good, and less so if it is not. 

Open-ended funds tend to suit investors who want continuous exposure to private markets without the complexity of managing multiple fund commitments across different vintages. They remove the J-curve drag and smooth deployment over time. They are also increasingly accessible to a broader range of investors, with lower minimums and simpler onboarding than traditional closed-end vehicles. 

For investors new to private markets, the evergreen structure may provide a more intuitive entry point. You invest, you remain invested, and you access liquidity through a defined — if limited — window. The trade-off is that you give up some of the return potential that comes from making concentrated, high-conviction bets in a specific vintage. 

The most sophisticated allocators typically hold both: closed-end funds for deep, vintage-specific exposure and concentrated strategy bets; evergreen funds for core, continuously compounding private markets exposure and portfolio efficiency. 

The bottom line

Both structures give you access to the same underlying private market opportunity — companies and assets that are not available through public markets, with the potential for returns that reflect genuine operational value creation rather than market sentiment. 

The structure determines how you get in, how long you stay, and how you get out. Understanding that distinction before you invest may seem like a mere technicality. However, it is imperative to understanding the risk exposure and liquidity of your investments.