An investment time horizon is the time period one expects to hold an investment. Time horizons can be specific if associated with a stated maturity, or generalised as either short-term, medium-term or long-term.
Time horizons are also usually associated with particular investment goals, strategies, and expectations. A time horizon might, for example, be tied to liquidity goals such as the purchase of a home, a child’s education expenses, or retirement. It might also relate to an investor’s specific expectations regarding the economy, inflation, or interest rates. Longer-term time horizons tend to span specific goals or economic expectations in favour of overarching objectives such as wealth accumulation and diversified investment management.
Time horizons are important to private equity investors as they generally represent a commitment of 10-12 years.
The three categories of time horizons are described below. These should be taken as general guidelines rather than specific limits.
Private equity funds are typically expected to have a 10-12-year duration, with the possibility of extensions to 16 years or more for some assets in the fund. This places private equity squarely in the long-term horizon category.
Within this overall time horizon, however, there are different stages of a private equity fund that offer periods of partial liquidity for investors through distributions they may receive during the harvesting period and through capital calls, which stretch out over the initial investment period as illustrated below.
Time horizons in private equity will also vary by the type of investment strategy being implemented, the general partner’s approach, and market conditions. A buyout fund, for example, may already have its target company identified when initiating the fund, thus shortening the potential horizon, while a venture capital fund may require additional years to identify all the targets that meet the GPs criteria.
Also, a Secondary Fund that purchases private assets from other funds could have a time horizon as short as 7 years or so. The initial Investment Agreement between the limited partners and the GP should offer guidance on what type of time horizon investors should expect.
The longer-term time horizons associated with private equity are also characterised by periods of illiquidity. This illiquidity is pervasive across private equity investments due to the absence of a formal secondary market for private company shares; however, as shown in the chart below, this illiquidity has allowed private equity managers to pursue investment strategies that have historically resulted in higher returns.
Thus, while liquidity is desirable, investors generally pay for it with lower overall returns. In addition, the longer time horizons associated with private equity funds can hold other advantages for investors, such as increased portfolio diversification and risk mitigation. Private equity investors are also able to gain exposure to the innovative opportunities associated with venture capital and the value-added strategies associated with buyouts – strategies that are generally not available to public equity investors.
Moonfare has developed a feature for its investors to address the inherent illiquidity in its private equity funds. A semi-annual auction for secondary shares is made available through its online platform, in conjunction with institutional partner, Lexington Capital. While this does not guarantee liquidity for all Moonfare investors, it does offer an opportunity twice each year for investors to either sell some or all of their existing holdings or bid for additional shares from other investors.
This content is for informational purposes only. Moonfare does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorised advisor. Past performance is not a reliable guide to future returns. Your capital is at risk.