The lifespan of a typical private equity fund is, but that ten years generally doesnt start until the team raises substantial capital and it doesnt end until all assets are sold. So, the lifespan of a private equity fund. Below, I discuss each of the stages that attribute to the real lifespan of a private equity fund.

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

Raising capital and building the team (1 to 2+ years)

– it can be very difficult to source capital, which is why most funds dont even get off the ground in the first place. Private equiteers 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 businesses. This is a defining moment because thelifespan of a private equity fund is longer than many marriagesand hence, the funds success firmly relies on the people chosen at this point (and specifically their resourcefulness, aptitude and ability to get along with others).

– 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 C-level executives while broaching the concept of private equity. It can be tough, it can be dispiriting, but were private equiteers, so its part and parcel. A motivated team can invest an entire fund in a couple of years, while slower funds may take 5+ years.

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 cant 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.

– 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 dont 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 youre not forced to sell, so private equiteers certainly dont 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 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.