Investors in closed-end funds make a commitment for the duration of a fund’s life cycle — known as the fund’s term — with liquidity available only through sale of assets, secondary transactions, or fund liquidation. Investors will also be liable to pay in amounts committed (as well as the potential recycling of certain distributions) for the duration of the term.
How long is a typical closed-end fund intended to last? Our analysis of the Goodwin Terms Database revealed distinct patterns across asset classes. Infrastructure funds favor the longest horizons, with half designed to operate for 12 years or more. Most private equity and venture capital funds — 56% and 72%, respectively — have a 10-year term. Real estate and credit funds, in contrast, typically opt for shorter durations, with the majority launched with an expectation of running for nine years or fewer.
These variations reflect the underlying investment strategies for each asset class. Infrastructure funds require extended horizons to develop and monetize large-scale projects. Credit funds, which deploy capital quickly into loans that mature in five to six years, naturally gravitate toward shorter terms. Real estate and credit funds show the greatest variation in duration, reflecting their diverse investment approaches.
While the term sets a fund’s intended lifespan, practical considerations come into play as it nears conclusion. To ensure the orderly realization of assets, funds typically include extension provisions. However, the full liquidation process of the fund will usually extend beyond the original term and any permitted extensions.
For investors, three key elements warrant particular attention during fund negotiations: the initial term length, available extensions (and which parties must consent), and fees during any extensions and the wind-down period. These factors, combined with limited exit options, make the fund’s lifespan a crucial consideration in any investment decision.
All funds typically have the ability to extend their term. Our next article will focus on how many extensions are permitted and what approvals are required.
[View source.]
