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Funds exit their investments in several ways to return capital to investors at the end of a fund's life
Key Takeaways
- Ben Blumenrose, managing partner at Designer Fund, an early-stage venture capital firm, explains what happens at the end of a fund's term length.
- Private funds have term lengths that investors agree to - after that they are required to return the money/wind down investments.
- Managers can exit a fund's investments by either leading a portfolio company to IPO or secondary markets sales (if a private equity or venture capital firm) or acquisition/sale of the underlying assets.
- For private equity and venture capital firms, selling their shares of companies on secondaries markets (private exchanges or to funds) can be a great option for liquidity, and doesn't necessarily mean accepting a discount to fair value.
What Happens at the End of a Fund's Term Length?
Hi, I'm Ben Blumenrose, managing partner of Designer Fund. Designer Fund is an investment firm that focuses on investing and founders that value design. We focus on preseed and seed-stage companies and investing in those founders and helping them succeed by building great products, in spaces that lack design innovation - healthcare, financial services, blockchain, AI, and climate tech.
As you come to the tail end of your fund, there are a number of ways for investors [fund managers] to start exiting out of their positions. One is hopefully, most of your later-stage companies are going towards IPO. So that's one way, and you can return the shares to your LPs. Two is acquisitions, so if a company gets to a place where it becomes a meaningful acquisition target is helping your founders find a good landing spot for those companies. But the third that a lot of people don't talk about is there actually are ways for investors and GPs to basically sell part of their stake or even all their stake on secondary markets to get liquidity for their LP. So we have heard about some GPs in the year 11 or 12; they basically sell the entire holdings of their fund to another holder who's more willing to hold it for another two or three, four years and get liquidity for the LP. So that is also an option for GPs to get liquidity and to get returns for their investors.
It's not necessarily that you're selling at a discount; it depends on the company. So if you want to sell some of the shares in a company that you're an investor in before IPO, or before they get bought in the secondary market, some companies you might have to sell a discount, but some companies that are perceived to be doing really well, you can actually sell at a premium to their last round. We have a number of companies that are doing that and are in that tier.
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