Extending Fund Lifespans: Typical Durations and Consent Requirements

As noted in our previous article, the lifespan of a closed-end fund typically ranges from 8 to 12 years, depending on the asset class. However, to provide flexibility to deal with issues related to illiquidity of assets, unresolved claims, and potential market downturns, almost all funds permit extensions beyond the stipulated term. 

The duration of these extensions varies by asset class, but analysis of the Goodwin Terms Database for Private Investment Funds reveals some additional clear patterns, particularly regarding the approval authority for such extensions.

Extension Durations Across Asset Classes

While fund documents typically provide for two one-year extensions, some funds allow three. The likelihood of three one-year extensions is higher in infrastructure funds and venture capital funds than in credit funds and real estate funds.

As noted in our previous article, infrastructure funds are more likely to have a longer initial term due to the longer investment horizons for infrastructure projects, and the additional flexibility in extensions reflects this. For venture capital funds, which typically hold minority stakes in underlying investments, the potential to extend for up to three years is partly due to exit timelines being less certain (particularly because fund managers do not have total control over the timing of exits).

Term and related extensions may further vary by sector and strategy within the same asset class.

Consent Requirements for Extensions

The process for approving extensions evolves as a fund’s term lengthens. Early extensions often grant general partners (GPs) significant discretion. As additional extensions are sought, the need for oversight from an investor and/or the limited partner advisory committee (LPAC) increases. This is generally consistent across all asset classes:

• First extension: 63% of funds surveyed allow GPs to authorize the first extension at its sole discretion, typically for one year.
• Second extension: 42% of funds surveyed require approval from the LPAC to authorize the second extension.
• Third extension: 41% of funds surveyed require consent from the fund investors to authorize the third extension. Note that further extensions can always be approved by an amendment to the fund documents, but this would require consent from at least 50% and usually 75% of investors by commitment or interest.

Impact on Management Fees

Management fees often become a point of negotiation during extensions. If an extension requires investor consent, discounts may be requested. The final terms depend on factors such as the number of prior extensions, the unrealized value of the remaining assets, and the manager’s exit strategy.

Alternatives to Extensions

Extensions are not the only option available to managers and investors at the end of a fund’s life. The thriving secondaries market offers an alternative, particularly through the use of continuation funds. These structures, which can be used throughout a fund’s life and not only at the end of the term, provide liquidity for investors looking to exit while allowing others to maintain their exposure to the remaining assets of the fund.

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This article is part of our ongoing Fund Terms Intelligence series, which provides market insights and benchmarks for key fund terms. Contact us to discuss your specific situation.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee similar outcomes.