Short and sweet

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In today’s fundraising markets, only the top-tier funds are likely to hit their targets. For the rest, significant incentives will be needed to convince those few LPs who are willing and able to make new commitments to get on board. One of the more compelling incentives those managers can offer, market sources say, is a shorter investment period.
Since the public markets took a dive last year, liquidity has been one of the most pressing issues on LPs’ minds. Once LPs were starved for cash and suffering from the denominator effect, the long lock-up periods of private equity funds began to feel, for some, more burdensome than anticipated. Reducing that lock-up period and getting money back to the LPs sooner – while still delivering great returns – could give a manager an edge over their competitors in terms of securing commitments.
“I'm absolutely seeing LPs prioritise liquidity, and a shortened fund investment period can be part of the effort to increase liquidity,” said David Winter, a partner at law firm Hogan & Hartson. “I've seen one fund with a relatively short investment period, and was told that the truncated investment period was designed entirely to be a selling feature to liquidity conscious LPs.”
This strategy is particularly necessary for first-time managers, who face a Herculean task in trying to hit their targets in this market with no track record behind them
“One way for first time managers to distinguish themselves is to have moderately shorter commitment periods with the intention of getting the money out, getting it back, and proving themselves as a first time manager as an incentive for people to invest money with them,” says Laura Friedrich, a partner at law firm Shearman & Sterling.
Those funds might include a two- to three-year investment period rather than a four- to five-year investment period. Of course, it’s easier to invest capital quickly for certain strategies, such as distressed debt investing or a fund designed to participate in the US TALF programme, said Richard Ginsberg, a partner and co-chair of the private equity practice of DLA Piper. A leveraged buyout fund would be hard-pressed to fully commit its capital in less than four years.
Not only is the asset-holding period shorter for debt, but the horizon for taking advantage of turmoil and mispricing in the debt markets is fairly limited to begin with, so a shorter investment period makes sense. It can also reassure LPs that the managers will deploy all their capital at the height of the opportunity.
“If a fund is saying that it is seizing on a temporary market dislocation, investors expect the investment period to be short so that the capital is deployed during the pendency of the opportunity,” said Roger Singer, a partner at law firm Clifford Chance. 
 One other enticement that managers can offer is no recycling of exit proceeds, Friedrich said. Again, it’s a way to get capital back into the hands of the LPs faster.