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- š ļø Investment Fund Key Terms, Part 6
š Happy Friday, funds family!
Today, we have Part 6 in our many-part series walking through each term in an investment fund term sheet in detail.
Last week, we discussed š ļø GP Commitment. Today, we'll learn about the Fund Term.
But first..
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If youāre a sponsor (GP) raising an investment fund or syndication in private equity, private credit, real estate, or venture capital, we may be a good fit for you. We also represent limited partners (LPs) investing in funds and syndications.
Thanks for reading. Now, letās jump into the article š
The term is the fundās lifespan. At the end of the fundās term, it liquidates its assets and winds down.
A standard fund term might look like this:
āThe Fund will be dissolved on the tenth anniversary of the Final Closing Date, or such earlier time as determined by the General Partner in its sole discretion or set forth in the Fund Agreement; provided that, unless the Fund is earlier dissolved, the term of the Fund may be extended beyond such date by the General Partner in its sole discretion for up to two years, and for up to one additional year thereafter with the consent of the LPAC or a majority in interest of the Limited Partners. The Fundās term is subject to early termination upon certain circumstances as set forth in the Fund Agreement.ā
ā”ļø How long do fund terms last?
In most closed-end funds, the fundās term is somewhere between 5-10 years, with 10 years being very common for illiquid strategies like venture capital and private equity.
The 10-year timeline often comes with some wiggle room. Most LPAs give the general partner discretion to extend the fundās life for a year or two. Plus, the LPs can further agree to extend the fundās term.
ā”ļø Are LPs locked in?
During the fundās term, as a general rule, LPs canāt withdraw their capital ā theyāre locked in. The general partner may facilitate redemptions or transfers in special cases, but LPs shouldnāt count on it.
In some cases, the LPs might have a ātermination rightā to end the fundās term early. Examples might include the right for 80% of LPs to terminate the fund for any reason, or the right for 51% of LPs to terminate the fund if the GP commits a ācauseā event (fraud, gross negligence, etc.).
ā”ļø What about open-ended funds?
Open-ended (or āevergreenā) funds donāt have a fixed term at all ā they last forever!
Unlike closed-end funds, open-ended funds do typically have a mechanism for LPs to withdraw capital from the fund, subject to guardrails. Weāll discuss common restrictions (called ālockupsā and āgatesā) in a future post.
šļø Next up in Part 7, weāll discuss the fundraising period.
Thanks for reading, everyone.
Have a great weekend! š
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