After the IPO, there are only 5 ways to increase capital within the portfolio of a closed-end fund:
- Making sound investment choices that appreciate and thus increase the net asset value
- Issuing debt, thereby leveraging the fund
- Issuing preferred shares, thereby leveraging the fund
- Conducting a secondary share offering (selling new shares to the public)
- Conducting a rights offering (giving existing shareholders the right to invest more capital into the fund in proportion to their existing ownership).
Similarly, there are only five ways capital can flow out of a CEF:
- Distributions to shareholders
- Poor investment decisions
- A tender offer to repurchase shares, which is a method to control discounts (see next slide).
- For leveraged funds only, forced sales to remain in compliance of leverage limits
- The liquidation of the fund
So, because capital does not flow freely into and out of CEFs, they are referred to as "closed-end" funds.
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