Investment Period

An investment period is the next crucial phase in a private equity fund’s life cycle after the formation stage, which includes finding investors, entering agreements, and deploying money. When a private equity firm finishes all the legal formalities of creating a fund, the General Partner (GP) responsible for fund management
establishes a limited partnership structure.

Now, the PE firm requires capital for finalizing deals with the portfolio companies selected in the pipeline. This is where the PE fund steps into the investment period, during which a GP makes capital calls or sources of investment. Then, after conducting due diligence on the companies, the GP negotiates and allocates the money to these underlying companies.

The GP proceeds with capital calls where the Limited Partners are intimated to contribute the committed amount. This process is also termed as “drawdown”. Indeed, a PE firm functions on behalf of the investors by deploying their funds in profitable investment opportunities and managing their investments. Thus, they serve as General partners to these investors. For a GP, the investment period is the only window for securing capital for a fund. As an investor enters into a Limited Partnership Agreement (LPA) with the GP, they are said to share a limited partnership relationship.

The PE firm makes money from the management fees they charge as a percentage of the invested or committed capital. However, some PE firms believe that the managers may crack poor deals in a surge of higher fees if the same is charged to the invested capital. There is always a limited time bandwidth for seeking investments with regard to a PE fund because of its closed-ended structure. The ultimate aim of a PE firm is to create value for the investors by securing an exit multiple.

Examples

An investment period is critical for private equity firms to attract investors and negotiate profitable deals with the portfolio companies. Let us have a look at some similar cases:

Example #1

Suppose a private equity firm, ABC Ltd., Issues a PQR Fund worth $75 million. Mr. X is the General Partner (GP) for ABC Ltd. The PQR Fund’s legal documents were signed on January 05, 2021. Also, the investment period, which was 3 years, began the same day and closed on January 04, 2024. A high net-worth investor, Mrs. Y, has committed to investing $5 million in the PQR Fund on March 18, 2022.

Mr. X informs Mrs. Y that her $5 million investment would be spread over the next 8-year commitment period, which begins on March 18, 2022, and ends on March 17, 2030. Hence, she does not have to make any investment right away. Now, as and when Mr. X calls for capital, Mrs. Y has to contribute that amount. However, after January 04, 2024, Mr. X closed the option to accept any further investments.

Example #2

Goldman Sachs Asset Management has successfully raised over $200 million in its inaugural European Long Term Investment Fund (ELTIF), Private Markets ELTIF 2023. This fund is designed for high-net-worth individuals interested in long-term illiquid investments, offering direct exposure to private market investments, focusing primarily on private equity with a secondary allocation to private credit.

The portfolio, which aims for global diversification reflecting active sectors and strategies, was fully funded in a considerably short investment period. A dedicated team of 1000 professionals is administering the fund. Goldman Sachs plans to introduce a series of Private Markets ELTIFs, providing individual investors access to private markets' performance and diversification benefits.

Investment Period vs Commitment Period

The terms investment period and commitment period are often mistaken to be synonyms in private equity funds. However, there is a fine line of distinction between the two, as stated below:

Basis	Investment Period	Commitment Period
Definition	It is the time frame during which the GP managing a closed-ended private equity fund actively enters into Limited Partnership Agreements (LPAs) with the investors after negotiating favorable terms to secure capital amount and allocate this money to the core portfolio firms.	It is the period for which the investor entrusts to contribute the promised capital amount in the private equity fund as and when called by the GP.
Scope	Focused on committing investments from Limited Partners (LPs) and deploying the capital amount into new investment prospects within the portfolio companies	Emphasizes the fulfillment of the commitment by the LPs to invest the agreed sum on the GP’s capital calls
Time Frame	Shorter, generally 3 to 5 years	Comparatively longer, I.e., 8 to 10 years or throughout the life cycle of the fund
Beginning and Ending	It starts with the completion of the formation or emergence period and ends at the onset of the harvesting phase.	It begins at the initial phase of investment and sometimes lasts till the end of the PE fund’s life cycle.

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