Private Equity & Venture Capital Investment Cycle

A typical Private Equity fund has an average lifespan of 12 years, including the time it takes the management team to raise capital from LPs (Limited Partners) as well as the time needed to liquidate all the fund’s investments/assets. When mentioning Private Equity, the term is being applied loosely. We are referring to all sub-types of private market alternative investment funds, i.e., Venture Capital, Private Equity, Private Credit, Real Estate, Infrastructure, etc.

This lifespan can be split into 5 phases, namely:


1. Formation
2. Fundraising
3. Sourcing deals & Investing
4. Portfolio Companies’ Management
5. Divestment


Moreover, it is important to note that these stages often overlap with each other. This is often the case for mangers with several funds, as a fund manager may raise a new fund whilst managing/divesting from a previous one. While additional human capital might be hired to deal with the increased inflow of work from managing multiple funds, there will also be a labor overlap.

This short article will discuss the above-mentioned 5 phases in the life cycle of a Private Equity fund.


1 & 2. Formation & Fundraising

The first phase in the life cycle of a fund is the formation of the fund itself, where the fund manager establishes the strategy of the fund, prepares the offering materials, and fundraises for the fund.


The length of this stage might vary depending on the experience and track record of the fund manager. An up-and-coming management team with little to no track record might take a few years to fundraise for a new fund, whilst an established fund manager can take just a few months.


During fundraising the fund’s management team is meeting potential investors and answering due diligence questions in an attempt to reach initial closing. During the same period, the fund’s team is also focused on creating a deal pipeline.


3. Sourcing Deals & Investing

Often referred to as the Investment Period, this phase usually lasts 2 to 5 years, the fund manager actually starts deploying the fund’s capital into investments.


From firstly identifying investment opportunities to conducting research and due diligence, fund managers and their teams focus on seeking out prudent investments and allocating all available capital within five years, or as otherwise pre-determined in the agreement between LPs and GP (General Partner, also known as fund manager). Meanwhile, the manager is calling on capital from investors as needed, usually on a deal-by-deal basis, to fund each new investment.


Often, private equity firms will start raising a new fund even prior to an existing fund’s expiration of investment period, as soon as they have some visibility over the exhaustion of the fund’s committed capital, traditionally when they hit the 70% deployment threshold.


In situations where the fund manager has not deployed all the capital committed during the period that was pre-determined as Investment Period, the fund manager will submit a request to the fund’s Limited Partners in order to extend that period.


4. Portfolio Companies Management

Most equity investments, depending on the asset class and the stake acquired in any given deal, grant investors seats on the company’s Board of Directors. The GP, in an effort to ensure its portfolio companies succeed, will provide advice, resources, connections and other management support. The GP will also use their position on the Board to influence the company’s direction and vote in ways they believe will be beneficial for the company’s long-term success


This asset management phase lasts for the duration of time throughout which an investment is part of the portfolio of the fund. During this period the fund will focus on operational improvements, growth and expansion, capital structure optimization, potential follow-on investments, any management team changes that may be required and other strategic initiatives. This work requires time dedication from a fund and its IPs (investment professionals) and hence LPs tend to consider how many IPs a fund has per GBP of capital committed.


A high ratio generally is interpreted as the fund being well equipped to be hands-on in engaging with its portfolio companies.


5. Divestment

During the divestment period, unless the fund’s term has been extended, the fund will be preparing for being dissolved, and hence all investments must be liquidated by the fund manager, and the proceeds distributed to LPs and the fund manager according to the terms of a pre-arranged distribution waterfall.


The liquidation doesn’t happen all at once. Instead, there are typically a series of liquidations over the course of several years. The divestment period usually lasts anywhere from 4 to 7 years after the end of the investment period.


+ Continuity of the Fund Manager

The extension phase of an investment fund is dependent on how the LPA (Limited Partnership Agreement) is structured. Some LPAs provide that the fund manager is able to extend the term of the fund for certain limited periods. These terms vary in multiple ways, such as in the number of times the fund manager may extend (often 1-3 times), how long each extension is (often 1-2 years) and the mechanism through which the fund manager can obtain consent to extend the term of the fund.


As the divestment process of private portfolio companies can take a significant amount of time, fund extensions become useful to fund managers and LPs in order to properly manage this phase and achieve the best possible returns.


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