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- š ļø Investment Fund Key Terms, Part 8
š Happy Friday, funds family!
Today, we have Part 8 in our many-part series walking through each term in an investment fund term sheet in detail.
Last week, we discussed š ļø Fundraising Period. Today, we'll learn about the Investment Period.
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
A fundās āinvestment periodā is the phase when the GP is authorized to deploy capital into new investments. š
A standard investment period might look like this:
āThe period during which the Fund may make new Portfolio Investments (the āInvestment Periodā) shall commence on the Initial Closing Date and shall continue for four (4) years thereafter, subject to extension by up to one (1) year at the discretion of the General Partner or such longer period as approved by the Limited Partner Advisory Committee (the āLPACā). Following the expiration of the Investment Period, the Fund may make follow-on investments in existing Portfolio Companies but shall not make new investments without LPAC consent.ā
ā”ļø How long is the investment period?
Most closed-end funds set an investment period of 3-5 years from the fundās initial closing date. The specific timeline often depends on the strategy and asset class.
As with the fundraising period and the fundās term, GPs sometimes retain the right to extend the investment period by 6ā12 months.
ā”ļø What happens when the investment period ends?
When the investment period ends, the fund stops making new investments.
However, the GP can generally:
Make follow-on investments in existing portfolio companies (for example, to protect or enhance prior investments).
Reserve capital for expenses, fees, or reserves related to existing assets.
Exercise options, warrants, and similar rights to acquire investments.
But the GP cannot initiate new investments ā unless approved by the LPAC or a majority of LPs.
In short, the fund transitions from its āgrowthā phase into its āmanagement and exitā phase.
ā”ļø Why does the investment period matter?
The investment period affects:
Deployment expectations: LPs use it to forecast capital call schedules and portfolio diversification.
Management fees: In most funds, the management fees decrease at the end of the investment period (either by changing the management fee percentage or the base on which the management fee is calculated).
Governance: Certain restrictions (such as time/attention requirements and successor fund restrictions) are eliminated at the end of the investment period.
Itās a key investor protection that ensures discipline and transparency in how long the GP has to put capital to work.
ā”ļø What about open-ended funds?
In open-ended funds, thereās usually no defined investment period. The GP can continuously invest capital as new subscriptions come in and redemptions go out.
šļø Next up in Part 9, weāll discuss capital recycling.
Thanks for reading, everyone.
Have a great weekend! š
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