How long can a fund last with 3rd quartile performance

Based on the most insightful WSO discussions, a fund with 3rd quartile performance and the described "business model" can survive for a surprisingly long time, but its longevity is heavily dependent on a few factors:

1. Fundraising Cycles and LP Turnover: Private equity funds typically operate on a 10-year lifecycle, with a 5-year investment period followed by a 5-year harvest period. However, funds often raise new capital every 4-5 years. If the fund can consistently rebrand and attract new LPs (especially first-time LPs who may lack due diligence experience), it can extend its survival. Institutional LPs, such as endowments and pension funds, often avoid first-time funds, but family offices and smaller investors might still bite.

2. LP Patience and DPI Realization: LPs generally wait to see DPI (Distributions to Paid-In Capital) before making re-up decisions. If the fund's returns are manipulated through aggressive marking or selective reporting, it might delay the realization of poor performance. However, once DPI trends become clear (typically 6-10 years after the first fund), LPs will likely abandon the fund wholesale.

3. Rebranding and Strategy Pivots: The ability to rebrand and spin new strategies can buy time, but this tactic has diminishing returns. LPs, especially institutional ones, will eventually catch on to the pattern of underperformance and high turnover, leading to a collapse in trust.

4. IR Turnover and Network Exploitation: Constantly churning through IR professionals to milk their contacts can work temporarily, but it’s not sustainable. Once the fund burns through its reputation in the LP community, it will struggle to raise capital, even with new hires.

5. Market Conditions: In bull markets, LPs may be more forgiving of poor performance, especially if the fund can spin its narrative effectively. However, in tougher market conditions, LPs will scrutinize performance more closely, accelerating the fund's decline.

Likely Timeline:

• Short-Term (1-2 Fund Cycles): The fund can survive by rebranding, spinning new strategies, and attracting less sophisticated LPs. Aggressive marking and selective reporting can mask poor performance temporarily.
• Medium-Term (2-3 Fund Cycles): As DPI realization exposes the fund's true performance and LPs lose trust, re-ups will shrink further. The fund may struggle to raise new capital, even with rebranding.
• Long-Term (Beyond 3 Fund Cycles): Without a significant turnaround in performance or a new strategy that genuinely delivers results, the fund will likely collapse as its LP base abandons it wholesale.

In summary, while the described fund can survive for a decade or more through rebranding and exploiting new LPs, its long-term viability is highly questionable. Once the LP community recognizes the pattern of underperformance and misrepresentation, the fund's ability to raise capital will dry up.

Sources: https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, What Happens when a PE Fund Closes?, https://www.wallstreetoasis.com/forum/private-equity/then-and-now-compbanker?customgpt=1, LPs/Investor Return Structure, https://www.wallstreetoasis.com/forum/private-equity/why-i-left-pe-switched-to-the-public-markets?customgpt=1