![]() Because the fund can continue to call capital from the LPs (until total calls equal the total committed capital of the fund), the fund can manage its cash flows to maximize its rate of return. So it is better for a fund to only keep a minimum amount of cash on hand (for near-term management fees, expenses and imminent investments) and to distribute the excess cash back to LPs. Giving money back to the LPs is known as a “ distribution.” As the previous cash drag example shows, keeping cash at the fund level when it isn’t needed will hurt the fund’s returns. Should it keep the cash on hand for an investment, management fees or fund expenses, or should it give the money to LPs. When a fund sells its stock in a portfolio company and receives cash, the fund has a decision to make. Usually early stage venture capital funds will have longer holding periods for their investments than for growth equity or buyout funds, as these early stage companies may take a long time to grow to a point where the fund can exit its position. Depending on the fund’s strategy (venture capital, growth or buyout), the fund can expect to hold its investment (the “ holding period”) in a portfolio company for 3 to 7 years. The table below shows the capital calls paid by the LPs to the Fund by year.īut when do the LPs get money back? That is the story of distributions.Īs a private equity fund makes investments in companies, these companies become known as “ portfolio companies” of the fund. In the second year, the Fund calls 20% of committed capital, or $20 million for more investments, management fee and Fund expenses. This means that in this first year, LPs will have paid cash of $15 million to the Fund, leaving another $85 million still available to call. The Fund expects to invest in 15 to 20 companies over a five year investment period, and then realize the investments (also called “harvesting” the investments) over the remaining term of the fund.ĭuring the first year, the Fund calls 15% of committed capital or $15 million dollars, to make investments and to pay management fee and fund expenses. For a detailed discussion of fund structure, see my blog post here and for a more detailed discussion of fund terms, see my blog post here. The Fund has a 10 year term, with two one-year extensions at the option of the fund’s general partner (“ GP”), for a total term of 12 years. The Fund has received commitments from LPs for $100 million (this means that the fund’s total committed capital (or fund size) is $100 million). (the “Fund”) is a growth equity fund formed to invest in technology companies. Thus, LPs will be making cash payments to the fund each year for many years. The fund will then make a series of capital calls over the life of the fund in order to make investments, pay management fee and also pay for fund expenses. The amount of this capital call will vary from fund to fund. Usually, on day 1 of a fund’s life, the fund will call come capital from its investors (also known as “ limited partners” or “ LPs”). For a more detailed discussion of Committed Capital, Called Capital, etc., please see my prior blog post here. The total amount of capital that has been called by a fund at any given time is called “ paid in capital” or “ called capital.” The metric “paid-in-capital” or “ PIC” is used for a variety of measurements to evaluate the performance of private equity funds. When the fund needs capital, the fund will notify the investors that it is “ calling” capital from the investors (a “ capital call”). ![]() The investment is not made up front, but is made over time as the fund needs capital. When a private equity fund is raised, investors will “ commit” to making a total investment in a fund, which is also called a “ capital commitment.” The total amount of all investor commitments is called the fund’s “ committed capital,” which is also what is referred to as fund size. If a fund receives all the cash up front, but the cash is needed over a period of time, it is better from a performance perspective to obtain the cash from investors only when it is needed, and not all up front.Ĭommitted Capital Called Capital Capital Calls The above example shows the impact of cash drag.
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