Private Equity Investing: The Life Cycle of Funds and Different Stages of Investment Opportunities

The Axis Line The Axis Line

According to research from S&P’s CapIQ, there are more than 2,500 private equity (PE) firms in the U.S., with funds ranging in size from more than $1 billion to less than $50 million. Most institutional investment firms have multiple funds of capital that are allocated to this alternative asset class.

PE fund timelines can vary, but there seems to be a consensus among some authorities in this segment of the marketplace around the standard lifecycle of a PE fund.

According to Blackstone’s Private Wealth Solutions group, the life cycle of PE funds is typically 7 to 10 years, and is generally broken down into three stages: the fundraising period, the investment period, and the harvest period.

Fundraising Period: The first few years is spent raising capital to create the fund. The outside investors (or Limited Partners) might include pension funds, endowments, insurance firms, family offices, funds of funds, and high-net-worth (HNW) individuals.

Investment Period: Next comes the deal phase, which is when the General Partners (GPs) decide on and pursue targeted investment opportunities. Typically, capital is deployed by investing in these uncovered opportunities within the first three to five years.

Harvest Period: Finally comes the harvest period, which is aptly named. This is when the risk can pay off in the form of returns to investors (as long as the investment proves successful, of course.).

Investopedia breaks the life cycle of a PE fund, or “Duration of the Fund,” into these five stages:

  • The organization and formation.
  • The fundraising period. This period typically lasts two years.
  • The three-year period of deal-sourcing and investing.
  • The period of portfolio management.
  • The up to seven years of exiting from existing investments through IPOs, secondary markets, or trade sales.

When assessing PE firms and their fund strategies, the stage of investment that a particular fund targets is a key area for investors to consider.

The Mergers & Inquisitions Blog offers this breakdown of investment stages for PE strategies:

Early Stage: This one is for pre-revenue companies, such as tech and biotech startups, as well as companies that have product/market fit and some revenue but no substantial growth. Venture capitalists and angel investors operate here.

Growth Stage: This one is for later-stage companies with proven business models and products, but which still need capital to grow and diversify their operations. Many startups move into this category before they eventually go public. Growth equity firms and groups invest here.

Mature: These companies are “larger” (tens of millions, hundreds of millions, or billions of dollars in revenue) and are no longer growing quickly, but they have higher margins and more substantial cash flows. Traditional leveraged buyouts take place here.

Declining: After a company matures, it may run into trouble because of changing market dynamics, new competition, technological changes, or over-expansion. If the company’s troubles are serious enough, a firm that does distressed investing may come in and attempt a turnaround (note that this is often referred to as a “credit strategy”).

Identifying a private equity fund’s current stage of investment during the due diligence process is key for helping investors determine whether they should allocate assets. If you need assistance in this effort, we can help. Reach out to us and we can help guide you through the selection process.

AltsAxis has centralized the vast alternative investment universe on one secure, proprietary mobile ecosystem. Pensions, endowments, foundations, family offices, and other institutional investors can access robust, dynamic, and unbiased data on a broad spectrum of alternative asset managers, as well as cutting-edge data modeling and visualization features, to make informed decisions on alternative investments. The Axis platform meets all sourcing needs for allocators, and enables them to securely facilitate virtual and in-person introductions to the alternative asset managers they follow and track. By allowing allocators and managers to continuously communicate and share information, the AltsAxis social network strengthens engagement within, and adds much-needed transparency to, the historically fragmented alternative investment universe.