Fund life

A closed end fund is not perpetual. Its fund life is conventionally around ten years with extension options, divided into an investment period of roughly the first five years, during which new investments are made, and a harvest period after it, during which the portfolio is realised.

Three consequences follow, and together they explain a surprising amount of sponsor behaviour. Capital not deployed within the investment period is generally released back to investors and stops earning a fee on committed capital, which is a genuine incentive to keep investing. Everything bought must be sold before wind up, so an asset acquired late in the investment period has a structurally shorter hold than one bought early. And an asset that cannot be sold in time is either sold anyway or moved into a continuation vehicle, a transaction with its own governance and conflict questions.

It also explains exit timing that looks irrational at asset level. A manager that has not returned capital cannot credibly raise its next fund, and the next fund is the franchise, so there is real pressure to realise even where holding another year might be worth more. The pressure can run the other way: a fund sitting below its hurdle has reason to hold its strongest asset longer, because a single large realisation may be what carries the whole fund into carried interest.

For a candidate the useful move is to connect fund life to the exit question. When an interviewer asks why a sponsor is selling now, the answer is often not about the asset at all.