Here, we’ll walk through the various stages of an investment fund’s life:
- Fund formation
- Initial closing
- Final closing
- End of fund term
- Liquidation of fund assets
Behind the Scenes: Form Fund Entities
Before you can run the fund, you must form the fund. For a more detailed look at the fund formation process, see our investment fund formation timeline.
Before you hold your first closing, you’ll need to:
- Meet with your attorney to discuss fund structure and goals;
- Form each legal entity in your investment fund structure;
- Draft the major fund documents (fund agreement, subscription agreement, management agreement, private placement memorandum, etc.);
- Negotiate with prospective investors and potentially enter into side letters with some limited partners; and
- Collect investor documents and ensure each prospective investor is a good fit for the fund.
Once you’re ready, you will hold your investment fund’s initial closing.
Initial Closing Date
Your investment fund’s initial closing date is the day you admit the first investor as a limited partner of your fund. It’s an exciting day! Now you can start making investments.
Most investment funds do not raise their full target fund size at the initial closing. For example, an investment fund may have a $100 million target fund size but only close on $50 million of commitments at the initial closing.
That’s ok!
Many funds continue fundraising for a year or two after the initial closing date. It can be easier to fundraise once you already have a solid base of investors.
Final Closing Date
In most closed-end funds, the fund agreement cuts off fundraising after a certain period.
For example, the fund might be able to keep raising money for 12 months after the initial closing date, subject to a 6-month extension by the General Partner. The fundraising period can often be continued even further if the existing investors agree.
Investment Period Ends
Most closed-end funds have a cutoff period for making new investments.
The period when the fund can make new investments is called the “Investment Period.” A customary investment period lasts from the initial closing date until the 5th anniversary of the final closing date.
While investment funds typically can’t make new investments after the investment period ends, funds can usually still allocate money to existing investments that need more capital (such as a startup raising its Series B round or an apartment building undergoing renovations).
After the investment period ends, many funds can still make the following investments:
- investments in connection with exercising options or warrants;
- investments that were already in process when the investment period ended; or
- investments approved by the fund’s limited partners.
Fund Term Ends
All good things end eventually. Most closed-end investment funds have a term of around 10 years. A typical fund life would be 10 years from the final closing date, with the option for the General Partner to extend the term for a year (or two) at its discretion and an option to further extend for another year (or two) if the limited partners agree.
The fund term often differs based on the fund type. For example, a fund of funds may have a longer life than a traditional investment fund.
When the fund’s term ends, the fund enters its liquidation phase and distributes its assets pursuant to the fund agreement.
Liquidate Fund Assets
When the fund enters liquidation, someone (such as the General Partner) becomes the “liquidator” and begins “winding down” the fund and distributing its assets. Typically, the fund pays off its creditors first and then distributes the remaining assets to its investors according to the fund’s distribution waterfall.
In most investment funds, the General Partner is subject to a “clawback” provision. A clawback requires the General Partner to return carried interest distributions to the fund if the General Partner received more carried interest distributions than it was entitled to over the life of the fund. We’ll dive into GP clawbacks in a future article.
After the fund is liquidated, the General Partner (or its lawyers) will file a Certificate of Cancellation and the fund is officially history.
For more information about the timeline and process of forming an investment fund, check out our investment fund formation timeline.