From Raising Capital to Generating Returns: The Private Equity Fund Lifecycle
Key Takeaways:
The Purpose of a PE Fund: PE funds exist to grow investments and deliver a ROI for investors
Navigating & Evaluating Possible Investors: Understanding the life cycle of a private equity fund can provide clarity on their capital raising endeavors
The Three Phases: The life cycle consists of three main stages: fundraising, the investment period, and harvesting returns
Understanding the Private Equity Fund Life Cycle
Private equity funds serve as a critical source of capital for business owners seeking liquidity and for businesses looking to grow, scale, or restructure. These funds operate within a structured framework, allowing them to deliver returns to investors while driving value creation. For businesses, understanding the type of private equity fund (i.e. buyout, venture, distressed, real estate, infrastructure, fund of funds, etc.), the size of the private equity fund, and where a private equity fund is in its life cycle is essential when considering a potential investment or acquisition proposal by a private equity fund. In this article, we discuss fund structure broadly and focus on the importance of fund life cycle in selecting a buyout fund investor.
The typical private equity fund life cycle spans approximately ten years, progressing through three main stages: fundraising period, investment period, and harvest period. Private equity firms operate multiple funds and are often at various stages of fundraising, investing and harvesting across the various funds.
If you are a business owner, founder, CEO or CFO it is important to understand from which fund (or funds) the private equity firm is investing in your business and where that fund (or funds) is in its life cycle. Funds at the end of the investment period may have less capital to deploy for additional growth and will have a shorter period of time to harvest the investments. Private equity firms that will be raising a new fund shortly after an investment in your business may have additional pressure to show early returns on their investment in your business.
Phase One: Fundraising
The cycle begins with laying a solid foundation to ensure that the fund is optimized for operation. It also ensures that the fund is legally ready. This stage is vital for creating a structure that can attract investors and sustain long-term success.
“The PE’s fund strategy is the blueprint for the fund’s activities. It guides the team through each stage of the private equity fund life cycle.”
Defining Fund Strategy
Every private equity fund starts with a clearly defined strategy. Fund managers determine:
The fund strategy (e.g. buyout, venture, distressed, real estate, infrastructure, etc.)
The sectors and industries to target (e.g., healthcare, technology, real estate).
The size and type of companies they intend to invest in (startups, growth-stage, or mature businesses).
Their risk tolerance and expected return on investment (ROI).
This strategy acts as the blueprint for the fund’s activities, guiding the team through subsequent stages of the private equity fund life cycle.
Setting Up Investment Structures
Most PE funds are structured as limited partnerships (LPs). This structure allows general partners (GPs) to manage the fund while limiting the liability of the investors, who become limited partners (LPs). This balance ensures operational efficiency and protects investor interests.
Establishing a compliant, well-organized foundation ensures the fund is legally prepared and operationally sound. The proper setup ensures trust with investors and long-term success.
Capital Commitments and Closings
Securing capital commitments is one of the most critical phases of the private equity fund life cycle. This stage determines the fund’s capacity to invest and create value.
The fundraising process involves securing commitments from institutional and high-net-worth investors. These commitments are typically made in phases:
First Closing: Marks the initial round of commitments, allowing the fund to begin operations.
Subsequent Calls: Follow-up rounds to raise additional capital from investors.
Final Closing: Concludes the fundraising period, locking in the total capital available to the fund.
This phased approach ensures flexibility while enabling the fund to reach its target size.
Successful capital raising relies on building trust through transparency, strong relationships, and compliance. Trust and clear communication are essential for securing investor commitments.
Phase Two: The Investment Period
“The investment period focuses on identifying new investment opportunities and creating value for the portfolio companies and the overall fund.”
Once the general managers secure capital, the fund enters its most active phase: the investment period. This stage focuses on identifying opportunities and creating value for both the fund and its portfolio companies.
Sourcing and Evaluating Opportunities:
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PE firms conduct extensive market research and maintain relationships with investment bankers to identify potential investments. The ideal target business depends on the fund strategy. For a buyout (LBO) focused fund, private equity investors are typically focused on:
Operate in growing industries.
Have high margins and generate strong cash flows
Have strong management teams
Require capital to fund expansion, acquisitions, or restructuring
Thorough due diligence ensures investments align with the fund’s objectives and maximize potential returns.
Portfolio Management
After making investments, private equity fund managers take an active role in their portfolio companies. Key responsibilities include:
Streamlining operations to improve efficiency
Enhancing financial performance through cost reduction or revenue growth initiatives
Guiding strategic decisions such as acquisitions, partnerships, or geographic expansion.
Strategic support can lead to significant transformations, helping businesses scale operations effectively.
Monitoring and Reporting
Private equity fund managers maintain regular communication with the CEOs and CFOs of their portfolio companies through weekly, monthly and quarterly meetings / calls. They also must maintain regular contact with the limited partners in their funds through detailed reports. These updates include:
Performance metrics, such as revenue growth and profitability of portfolio companies
Net Asset Value (NAV): Calculations reflecting the value of the fund’s investments
The investment period is the most hands-on phase, requiring strategic execution to maximize value creation. This phase is crucial for aligning investment strategies with growth outcomes.
Phase Three: Harvesting Returns
Once investments mature and achieve target growth, the fund enters the harvesting period. The investment phase is typically between five to six years. The harvest phase is typically four or five years.
Asset Sales and Exits
Private equity firms typically monetize their investments through:
Initial Public Offerings (IPOs): Offering shares to the public for the first time, which can yield high returns
Strategic Sales: Selling to another company in the same or complementary industry
Secondary Sales: Transferring ownership to another private equity firm or institutional investor
The timing of these exits is crucial. Fund managers monitor market conditions to ensure sales occur at the optimal moment for maximizing returns.
Profit Distribution
Once the sale is complete, the fund managers disburse the proceeds to the fund’s investors based on the terms agreed upon in the partnership agreements set during the foundation and investment phases. This includes:
Returning the invested capital
Allocating profits based on the performance of the investment and the overall fund
This stage also involves detailed financial reporting to provide transparency regarding returns and distributions.
Strategic Considerations
The harvest period focuses on converting investments into tangible returns while ensuring strategic and financial goals are met. This stage requires carefully balancing timing, market conditions, and exit strategies. Businesses receiving investment must align with these objectives to ensure mutual success during the exit process.
Orderly Wind-Down
The final stage of the private equity fund life cycle involves an orderly wind-down of operations and the legal closure of the fund. Often private equity sponsors may require additional time and follow-on capital to optimize the value of remaining assets at the conclusion of the harvest period. This can be achieved through several means such as term extension, a liquidating vehicle, distribution in kind, and annex funds. For business owners, founders, CEOs and CFOs considering a private equity investment, it is a good idea to understand the implications of these alternatives on their own monetization options.
The Bottom Line
The private equity fund life cycle can vary from fund-to-fund, but the above illustrates a typical fund structure. This structured approach to investing, managing, and exiting businesses,, combined with their approach to value creation and leverage, underpins the PE firms ability to generate larger returns for investors. For companies seeking investment, understanding this life cycle is crucial for:
Identifying the right investors
Preparing for the complexities of raising capital
Aligning long-term business goals with the fund’s objectives
The key stages of the private equity fund life cycle, from raising capital to harvesting returns, provide a solid structure for both fund managers and businesses seeking funding. Knowing where a fund is in its cycle helps businesses make informed decisions about potential partnerships and investments.
Keene Advisors is experienced at advising companies on a broad range of leveraged finance transactions and corporate finance matters. Our team has advised clients in connection with over $20 billion of financing commitments and corporate debt capital-raising transactions. We have helped clients fund organic growth, fund dividends to shareholders, buy out existing shareholders, fund acquisitions, and refinance existing debt. In addition, our professionals have advised clients on credit agreement amendments, operational and balance sheet restructurings, and a range of bankruptcy-related matters.
Contact us today to explore how we can assist in navigating the private equity life cycle and securing the optimal investment for your business.
Disclaimer: This commentary is intended for general informational purposes only. Keene Advisors does not render or offer to render personalized financial, investment, tax, legal or accounting advice through this report. The information provided herein is not directed at any investor or category of investors and is provided solely as general information. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action. Keene Advisors does not provide securities related services or recommendations to retail investors. Nothing in this report should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.