January 29, 2022

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Meaning of Investment Period for Private Equity Fund and Explanations

Meaning of Investment Period for Private Equity Fund and Explanations
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Gumroad, a platform that helps creators to monetize their products and services, in March, 2021 was able to raise a total of 5 Million Dollars from regulated equity crowdfunding. This was done within 12 hours which can be called the investment period. Although equity crowdfunding is not under discussion, applying it to a venture capital investment is not out of place.

Definition — What is Investment Period

It is the timeframe allowed for investors to subscribe to a private equity fund before various capital calls. You may define it as the period of time a fund is allowed to raise capital through subscription from investors. Or according to Beginner’s Glossary to Fund Finance by Mayer Brown “a timeframe, typically a fundraising period of 12 months, during which a private equity fund is permitted to accept new investors or subscriptions.

Read: Meaning of Commitment Capital for VC Fund and Explanations

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Key Explanations

A timeframe or time period. An investment period is a timeframe. Most funding in VC investment is 12 months. For Gumroad, which is also a private equity firm, it took just 12 hours to raise $5 Million from 7,303 investors or subscribers and another $1 Million from only 3 investors. That’s a total of 6 Million Dollars.

Fundraising period. Investment period can also be called fundraising period. This is also the timeframe allowed to raise capital required by a private limited company. In some textbooks, investment and commitment periods are similar in meaning. But, in this article, the two terms are seen differently.

While an investment period is mostly 12 months, a commitment period can be for five years or at least 3 years. Also, the former is for investors to subscribe while the later is used to call for payments of capital of the amount subscribed.

READ ON  Meaning of Commitment Capital for VC Fund and Explanations

Investors or subscriptions. For the fund to pull through, it is expected to attract investors or subscriptions by prospective investors. During the period of investment, the money collected is what is referred to as subscriptions.

Capital call. As explained in a previous article, the VC firm will make several capital calls for a private equity fund. The calls usually occurred after the investment period. Generally, during the life span of the fund, several capital calls are drawn down.

The calls are from what was subscribed by investors. If a total of 10 Million Naira was subscribed, for example. Five calls of 2 Million Naira each may be allowed by the Venture Capital firm.

Read: Meaning of Venture Capital (VC) Fund and Key Explanations

Why Investment Period?

It is used not in private equity funds alone but also in real estate. A time frame allows for orderliness on one hand and ensures that capital needed is subscribed to within a time bound. This will also enable the Venture Capital firm to achieve their goal within a particular period of time. Therefore, making capital available to entities that needed it.

READ ON  Differences between Venture Capital and Angel Investor

Conclusion

Finally, the investment period of a private equity fund is the time frame to raise funds through subscriptions from investors. It only occurs once in the life cycle of a fund. Another word for it is fundraising period. In most cases, the timeframe is 12 months and it is only after this several capital calls are requested.

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