The Private Equity Fund Life Cycle

The life cycle of a typical private equity fund is usually ten years, but that ten years generally doesn’t start until the team raises substantial capital and it doesn’t end until all assets are sold. So, the life cycle of a private equity fund may stretch to as long as 15 years. Below, I discuss each of the stages that attribute to the real life cycle of a private equity fund.

It’s also important to note that these stages overlap and that funds even overlap. As you raise a new fund, you may be managing and harvesting investments from a previous fund. And, while you may hire new private equiteers to manage the new fund, invariably there’s a labour overlap and old funds create a hindrance.

1. Raising capital and building the team (1 to 2+ years) it can be very difficult to source capital, which is why most funds don’t even get off the ground in the first place. Private equity firms may spend upwards of two years creating hype and luring investors until they reach their funding target. If and when the final funding round closes, the managing company must then build the team to invest in and manage the portfolio companies. This is a defining moment because the life cycle of a private equity fund is longer than many marriages and hence, the fund’s success firmly relies on the people chosen at this point (and specifically their resourcefulness, aptitude and ability to get along with others).
2. Sourcing deals / the investment period (2 to 5+ years) most mid-market firms source deals themselves, though they may entertain bankers and advisers on the odd occasion. This stage requires a dedicated team willing to sell themselves to private companies and C-level executives while broaching the concept of private equity. It can be tough, it can be dispiriting, but we’re private equiteers, so it’s part and parcel. A motivated team can invest an entire fund in a couple of years, while slower funds may take 5+ years.
3. Managing and improving the portfolio (3 to 7 years per investee) – once a team makes an investment, it needs to work quickly to create a record of exceptional performance. A team can’t just wait until before an exit to make a difference because potential buyers look at medium-term historic performance when conducting their valuations. This can be a stressful time in difficult economic conditions or a blissful times during strong economic growth.
4. Exiting the investments (varied time frames) an exit can occur 6 months after your investment if the right strategic buyers and economic conditions present. However, an exit may drag out for 7+ years if the investment underperforms, the economy teeters, and buyers don’t present. The longer an investment remains in a portfolio, the higher the required exit price to meet target IRRs. If investments remain at the end of the official ten year term of the fund, there are a range of options: a) the investment may be sold to a secondary fund, b) the fund may be extended for anything from 1 to 3+ years, or c) the fund can hold a fire sale. The best exits are with many potential buyers and when you’re not forced to sell, so private equiteers certainly don’t want to hold fire sales. And, since the team likely raised another fund, extending this fund will only hinder the new fund.

Keeping in mind that the average fund has a real life cycle of 12+ years, most private equiteers will likely have left the firm before seeing a whole fund through. Food for thought, especially when calculating your likely carry received at each stage.