Just as wines have “vintage years”, private equity funds also have "vintage years."  But what is a vintage year?  For wine, it’s universally recognized as the year the grapes were harvested.  However, it’s not that simple for private equity, as various industry participants define “vintage year” differently.

Consider the following hypothetical:  In 2011, two private equity professionals decide to raise a fund.  That year they form a legal entity for the fund and launch their fundraising efforts.  In late 2012 the fund has its initial closing of commitments from limited partners, and makes its first capital call, where limited partners make their first cash contribution to the fund.  In 2013, the fund makes its first investment.  In 2014, the fund has its final closing.  As of September 30, 2018, the fund has a net IRR of 18.5%.  What should the vintage year be for this fund - 2011, 2012, 2013 or 2014?

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An important event in the life of a private equity fund is when the fund “exits” its investment in a portfolio company.  An exit is also known as the time when a fund “cashes out” or “liquidates” its investment in a portfolio company.  Exits occur in three main ways: (1) the portfolio company is sold and the fund receives cash or publicly-traded securities for its shares in the portfolio company; (2) the portfolio company holds its initial public offering, or IPO, and the fund later sells its shares in the portfolio company on the public market or the fund distributes the publicly-traded shares to the fund’s limited partners; and (3) the fund sells its shares of a portfolio company to another investor in a private transaction (this is known as a direct secondary sale).  While there are other ways a fund can achieve a full or partial exit, the above exit routes are the main ways a fund achieves liquidity.
 
We have discussed IPOs in prior posts (see for example: LP Corner: What LPs Need to Know About IPOs).  In this post, we will discuss some of the things about the sale of a portfolio company that LPs should know.
 
Common M&A structures.
The sale of a company can take many different forms.  The most common sale structures are:

• Stock for Cash
• Stock for publicly-traded stock
• Stock for privately-traded stock
• Asset sales
• Mergers

The type of structure can have an impact to a limited partner in a fund (“LP”) in terms of how and when the LP may receive a distribution from the fund relating to the transaction.
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