What Does Overall Fund Period Mean?
The overall fund period refers to the life in years of the private equity fund, which has traditionally been approximately eight years with an option to extend for two two-year periods. Therefore, the maximum overall fund period is typically 12 years. Prior to the overall fund period coming due, all investments must be liquidated to ensure distributions are fully paid using the specified waterfall structure.
Divestopedia Explains Overall Fund Period
After the 2008/2009 financial crash, there is a trend for overall fund periods to be shorter, closer to an average of six years with option to extend for two one-year periods. This puts considerable pressure on the GP to invest early in the fund's life and seek quick flips on investments to monetize within the shorter overall fund periods.
While this may improve the IRRs realized by limited partners due to the shorter investment periods, it may put in jeopardy the ability to monetize investments at the highest multiple possible. Oftentimes, private company investments need at least five years after the initial private equity investment to see through its strategy fully (regardless of whether it's a growth, turnaround or operational efficiency strategy).