Authors: Stathy Markatos, Ethan Reis
In this blog, we examine the timeline of a typical closed-end Canadian private equity or venture capital fund.
The timeline of a private equity or venture capital fund can vary significantly based on factors unique to the fund in question, such as the size of the fund, the investment strategies of the fund and the nature of the investments targeted by the fund.
Additionally, most private equity and venture capital funds in Canada are structured as limited partnerships, which are governed by limited partnership agreements. Investors participate passively in the limited partnership as limited partners, while the general partner manages the business and affairs of the limited partnership (or more typically delegates this authority to a separate fund manager). The timeline of a fund will largely be defined by the terms and conditions of the limited partnership agreement establishing the fund and the manner in which the general partner exercises its discretion over the fund in accordance with the agreement.
This blog focuses on the timeline of a typical closed-end private equity or venture capital fund in Canada, as derived from our experience in advising these entities.
The timeline of a private equity or venture capital fund
A closed-end Canadian private equity or venture capital fund typically has a term of ten years, with the potential for the general partner to extend the term for one or more additional one-year terms.
During the term of the fund, the manager will raise capital for the fund, invest that capital in accordance with the fund’s constating documents, hold and monitor existing investments, and then dispose of the fund’s investments, using the proceeds to pay the fund’s investors.
These steps can be broken down into four distinct stages over the life of a fund, though there is often overlap from one stage to another.
1) The marketing stage
The first stage of a private equity or venture capital fund is the marketing stage. During this stage, the manager markets the fund, solicits potential investors and raises capital.
The fund typically raises capital through private placements to accredited investors. Marketing activities are typically restricted to smaller private presentations and funds may provide potential investors with a confidential offering memorandum or investor presentation.
During the marketing stage, the manager may negotiate fund terms with institutional investors and will work closely with the fund’s legal counsel to prepare the documentation through which investors become partners in the fund by subscribing for units or interests. The fund documentation typically includes the limited partnership agreement, management agreement, subscription agreements, side letters, confidential offering memorandum and investor presentation.
Most funds will try to obtain capital commitments from the majority of investors for the “initial closing”. The fund will typically allow for the admission of new investors after the initial closing through multiple additional closings, known as “subsequent closings.” The limited partnership agreement establishes a deadline for the “final closing date,” which is typically six to twelve months after the initial closing. The marketing stage, including the fund’s period for raising capital, concludes on the final closing date.
2) The investment stage
The second stage of a private equity or venture capital fund is the investment stage, sometimes referred to under limited partnership agreements as the “commitment period.” During this period, the manager identifies investment opportunities and the fund makes investments using capital obtained from investors.
Throughout this stage, the fund will call on investors to commit additional capital to fund specific investments and may liquidate some of its existing investments.
The marketing stage and the investment stage may overlap, however, the commitment period generally runs for a period of four to six years from the date of the fund’s initial closing.
3) The divestment stage
The third stage of a private equity or venture capital fund is the divestment stage, during which the fund will hold, manage and then liquidate its investments. The general partner will make distributions to investors as investment proceeds are received.
The fund will usually stop making new investments during the divestment stage, though some new investments or follow-on investments in existing investees may be made as permitted under the fund’s constating documents. At this stage, the fund will focus on monitoring its existing investments and looking for advantageous opportunities to dispose of them.
The manager will not liquidate all of the fund’s assets at one time. The divestment stage typically runs for a period of four to six years.
4) Dissolution and liquidation stage
The dissolution and liquidation stage represents the final phase of a private equity or venture capital fund. During this stage, the fund actively liquidates its remaining investments and distributes the resulting investment proceeds to investors, unless the general partner extends the fund’s term as permitted by the limited partnership agreement or the limited partners decide to extend the term. It may become necessary to extend the fund’s term if market conditions are not favourable for selling investments. After all the investments have been sold and the proceeds distributed to the investors, the fund will be dissolved in accordance with the limited partnership agreement.
Early termination
In addition to the stages identified above, some limited partnership agreements include provisions that allow the limited partners to initiate the early termination of the fund, or facilitate the removal of the general partner and the management agreement (both with cause and without cause).
Typically, limited partners can terminate the general partner and the management agreement or the fund itself if certain specified actions or events occur, such as fraud, willful misconduct, material breach of the limited partnership agreement, breach of fiduciary duty, or gross negligence by the general partner or the manager. The limited partnership agreement outlines the policies and procedures to be followed after the early termination of the general partner, the manager or the fund itself.
The MLT Aikins Private Equity and Venture Capital practice group has extensive experience advising funds and investors on accessing world-class opportunities that are unique to Western Canada, from businesses in the industrial and agriculture sectors to Indigenous-owned enterprises, technology start-ups and emerging growth companies. Contact us to learn more.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.