Capital deployment is the process of deploying capital into investments. Forecasting capital deployment per period (e.g. year, quarter, month) is important for budgeting for investment pacing, reserves for follow-ons, creating a schedule for capital calls, management fees, and fund expenses.
Fund time periods
A capital deployment schedule is based off the forecasted expenses and investments by the fund, which will be determined by the fund's investment strategy and a few operational timelines:
- The fund operating period (fund life), typically 10 years for closed-end venture funds, with the potential to extend for a year or two. This will be the periods over which the fund is operated and investments are managed until all companies have exited or investments have been disbursed. This will be the period over which the fund incurs operating expenses.
- The management fees period, which is the time when management fees are charged. This will typically run over the fund operating period, except often management fees will not be charged in the extension periods, if applicable.
- The initial investment period, typically 2 to 4 years, depending on fund size, which is the period where new investments are made.
- The follow-on investment period, which can be forecasted from the investment pacing, expected graduation rates, round sizes, and timing between rounds to create a schedule of reserves and use of reserves for follow-on investments.
- The recycling period, which is the period when proceeds from investments can be recycled. Limited partnership agreements (LPAs) often have a number of parameters which can impact the amount of capital that can be recycled and the period when recycling is allowed. More at Recycling.
Follow-ons could be done by the fund, by SPVs outside of the fund, by separate growth funds operated by the same management company, and by direct LP investments, so there are a mixture of strategies available for fund managers to participate in follow-ons outside of reserving capital in the fund.
Components of a capital deployment schedule
Combining the time periods and the fund's investment strategy, the capital deployment schedule will be based on:
- Budget management fees based on management fee schedule
- Budget fund expenses over the fund operating time period (likely 10 years)
- Budget new investments over period for new investments (likely 2 to 4 years)
- Optionally, budget for follow-on investments based on projected proratas and timing
- Optionally, forecast recycling of management fees based on proceeds
Sum up all the capital needs per period, and that creates a schedule for capital calls per period. The sum of all capital calls should equal total committed capital. This will also calculate the total invested capital, the amount of the fund size that can be invested, net of fees and recycling.
Capital calls can vary from that approach, however. Many funds will create different capital schedule; one common approach is an accelerated capital call schedule, where instead of calling an equal amount per period, they may call a larger amount in the beginning, either for practical ease in calling capital from LPs, or to create a schedule that frontloads the investment pacing.