Private Equity: Episode 10 – The Stages in the Life of a Fund

The 4 Phases of a Private Equity Fund’s Life

The J-curve helps understand the evolution of a Private Equity fund’s profitability profile, and you’ve likely noted that it evolves over time. This evolution is correlated to the different stages in the fund's life cycle. For a closed-end fund, meaning one with no ability to sell shares before liquidation, we can identify four main phases.

The first phase, fundraising, corresponds to the period during which the management team seeks investors, who are invited to subscribe to the fund's shares. This phase generally lasts one or two years, and after this time, no further subscriptions are allowed.

The second phase is the investment period, during which the management team deploys the raised capital. The goal is to identify the best opportunities according to their strategy. They analyze the companies or projects through due diligence, reviewing all aspects of the target: financial and economic situation, technical analysis, team meetings, factory visits… The aim is to create a comprehensive inventory of the company and obtain an accurate picture. Investment decisions are based on the results of these analyses.

Once the funds are fully deployed and investments made, the management team focuses on supporting the development of its holdings. The management company leverages its network and expertise to assist the portfolio companies in their growth: internationalization, digitalization, launching new products, assisting with acquisitions, and more. It’s during this phase that value creation happens.

The final phase is liquidation. Once the development projects are complete, the management team organizes the sale of the holdings. They work to find buyers in order to retrieve cash and return funds to their investors. The holdings are liquidated either by selling them to other funds or companies or by taking them public through an IPO.

Once the entire fund has been liquidated, investors can recover their investment plus the capital gain (when everything goes as planned!).