Why would a PE firm create multiple funds for the one of the industries they invest in? Why don’t they add cash into the exiting fund? Is it because different funds have different targets? Or different funds have different risk factors associated with them to attract different investors?
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It depends on the firm but generally they sponsor closed end funds that are intended to match the investment horizon of their strategy and the time at which their investors want their money back.
Unlike mutual funds or hedge funds from which investors can contribute or redeem their investment based on specific guidelines, PE funds invest in illiquid securities so investors can’t invest or redeem at their choosing. As a result, when raising money they will specify an investment period (generally 3-5 years with possible extensions) and then a harvest period. This way investors can appropriately plan out their capital commitments and liquidity reserves across their different PE strategy exposure.
There are certain firms that sponsor what are called evergreen funds that don’t have a defined life so to speak and they look a little more open ended like you described above.
A more technical reason is the legal entity of the fund is typically a limited partnership and under US corporate law they are supposed to have a limited life.
Thank you!
One mistake here. Investments are usually 3-5 years, but funds themselves have 10-12 year fund lives. Because obviously the investments will be spread among the first 5-7 years and then you realize investments over the last 3-5 years
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