Private equity rolling funds: flexibility for managers and investors

In a sector as dynamic and fast-moving as private equity, it’s not uncommon for fund managers to look for new and innovative ways to create opportunities for themselves and their investors. Rolling funds are one such development.

Unlike traditional closed-end funds that raise capital once and have a fixed investment period, rolling funds operate on a subscription basis with periodic capital calls. 

Typically, investors commit capital on a quarterly basis, and fund managers deploy this capital into investment opportunities. Each subscription period creates a new fund series, allowing continuous fundraising and deployment.

Investors can choose to renew their commitments for subsequent periods or opt out, providing flexibility and liquidity compared to traditional private equity funds.

Management and performance fees operate in a similar way to traditional funds. For example, management fees may equal 2% of committed capital, while performance fees could equal 20% of profits above a certain hurdle rate.

Advantages for fund managers

• Continuous fundraising: Rolling funds allow managers to raise capital continuously, reducing the pressure and time constraints associated with single fundraising events.
• Steady capital flow: The periodic capital calls ensure a steady flow of fundraising, enabling fund managers to take advantage of investment opportunities as they arise.
• Flexibility: Fund managers can adjust strategies more dynamically in response to market conditions and investor demand, providing more agility than traditional closed-ended funds.
• Increased investor base: The ability to continuously accept new commitments allows fund managers to build a larger and more diverse investor base over time.

Advantages for investors

• Lower initial commitment: Investors can start with smaller commitments and gradually increase their investment over time, reducing the barrier to entry.
• Flexibility and liquidity: Investors aren’t locked into long-term commitments and can choose to renew or opt-out at each subscription period, offering greater liquidity.
• Diversification: Rolling funds allow investors to diversify their investments across multiple series and time periods, potentially reducing risk.
• Access to opportunities: Investors can gain access to ongoing investment opportunities rather than waiting for the next traditional fund to open.

Potential disadvantages for fund managers

• Administrative complexity: Managing multiple fund series and periodic capital calls can increase administrative burdens and require robust systems.
• Investor relations: Continuous fundraising requires ongoing communication and relationship management with investors, which can be resource intensive.
• Performance pressure: The need to consistently deliver results to encourage re-commitments from investors may add pressure to the fund manager’s performance.

Potential disadvantages for investors

• Uncertainty in performance: The performance of a rolling fund can be more variable due to the continuous nature of investments and varying market conditions.
• Complexity in tracking: Investors need to track multiple fund series and commitments, which can be complex and require careful management.
• Potential for lower returns: The flexibility and liquidity of rolling funds might lead to lower returns compared to traditional long-term private equity investments, which benefit from a locked-in capital structure.

Flexibility in fundraising

Rolling funds offer an innovative and flexible approach to private equity investment, providing benefits in continuous fundraising, steady capital deployment and greater investor flexibility. However, they also come with the challenges of increased administrative complexity and the need for continuous performance. 

Both fund managers and investors should weigh these factors carefully when considering rolling funds as an investment vehicle.

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