Organization
and Formation
Fundraising
Deal Sourcing
and Investing
Portfolio
Management
Exit or
Harvest
1. Organization and formation
The fund formation phase is the first stage in the fund life cycle. During this time the fund manager develops the fund’s strategy, determines fund terms, and prepares the offering materials, including the limited partner agreement. Fund managers will incur costs associated with setting up the fund, including legal and other organizational expenses. These expenses will usually be offset by profits the fund generates when the fund closes, but if the fund is unsuccessful in reaching a close, the partners are liable to cover costs. This is therefore an anxious time for most managers, especially for emerging managers (those seeking to raise their first fund).
Organization
and Formation
2. Fundraising (1-2 years)
During this time the fund manager will approach potential investors, answering due diligence questionnaires to try and secure capital commitments for the fund. Once the GP has obtained sufficient interest from investors, it will hold an initial closing for the fund, at which point the GP can start making investments. However, for many funds the fundraising period will continue past the initial close, allowing the fund to generate additional capital commitments for subsequent closings until its overall fundraising target has been met.
The time taken to raise a fund can vary from a few months (for established managers) to a few years (for emerging managers). According to Preqin data, time spent on the road for private capital funds is an average of 18 months.
3. Deal-sourcing and investing (1-4 years)
In order to generate returns for investors, GPs must find and complete successful transactions. During the deal-sourcing and investing period, capital from the fund commitments will begin to be deployed into investments. GPs will source and evaluate potential investment opportunities, conduct valuation due diligence and close deals, determining an appropriate level of capital commitment for each opportunity.
GPs will not request (call) all the capital from LP commitments in one go, but as needed to fund new investments. During this time the fund will still be in deficit, and so investors must be prepared for losses in the first few years prior to the fund generating cash inflows.
4. Portfolio management (3+ years)
Once the fund manager has made investments they will work to manage and grow the companies or assets within their portfolio. At this point the fund will begin to generate returns for its investors.
The types of activities undertaken by a fund manager during this time will vary depending on the type of asset and strategy pursued, but the overall goal will be to support the development and growth of the company or asset in order to secure strong returns for investors and to position it for an eventual sale. The time from an initial investment to exit (when the fund sells its position in the asset) can range from months to years.
5. Exit or harvest (4+ years)
The final stage in the life cycle of the fund is the exit or harvest phase. During this time the fund manager begins to sell its positions in the companies or assets in which it has invested. The GP will seek to produce a rate of return that will meet or exceed the expectations of its investors.
This liquidation will not happen all at once, but over several years following the end of the investment period. Exit strategies vary by asset class, and this might include a sale to a strategic buyer, sale on the secondary market, or in the case of companies a manager might hold an initial public offering (IPO), issuing shares on the public market.
Fundraising
Deal Sourcing
and Investing
Portfolio
Management
Exit or
Harvest
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