Both equity and debt are used for closed-end fund financing. The ratio of both types of financing to each other is important
Closed-end fund financing primarily uses investors' capital. However, this is not sufficient in all cases to make closed-end fund financing possible. For this reason, some companies take on additional debt capital.
This makes it possible to take advantage of other tax benefits, but at the same time you have to pay interest and repay principal on these funds.
The financing of closed-end funds
Closed funds pursue a certain project after their edition and acquire with ship funds for example a container ship, with wind funds however with the available capital a wind park is financed. High investment quotas are particularly ideal for investors, as this means that the money does not have to be managed elsewhere and can be used to its full extent. By investing in tangible assets, it is subsequently almost impossible to withdraw capital from the closed fund, as this money is tied up for the long term.
The closed fund financing with outside capital
Closed-end funds that use only investor capital for their funding are rare to find. It is much more common to find funds that take on additional debt capital from banks for the financing of closed-end funds. This capital will then be used to finance the project in question.
At the same time, borrowing money for closed-end fund financing also offers the advantage of leverage. This is understood as a leverage effect, because the lower equity ratio allows it to perform much better. At the same time, however, there is of course the risk that the leverage effect has a negative impact, because interest and redemption charges can put a considerable strain on a fund. Investors should therefore ensure that debt and equity are in reasonable proportion in closed-end fund financing.
Financing for closed funds
Investors who want to invest in closed-end funds should also think about their own funding. In most cases the capital for the fund subscription comes naturally from own capital funds, which are not needed at present and are to be invested on a long-term basis.
At the same time, it is also possible to take out a loan from the bank for the financing of closed funds. Just as with internal credit financing, it is also possible in this way to increase the return accordingly and thus to use the leverage effect. However, it must not be forgotten that the outside financing with the closed fund can also bring risks with itself. If the forecast returns cannot be achieved, investors must finance the interest and redemption payments from their own assets.