A fund size target built bottom-up from deal pace, cheque size, reserves and the share of commitments that is never invested.
A successor fund should be sized bottom-up from what the team can deploy: platform deals a year times the average cheque times the investment period, plus reserves for follow-ons, grossed up for the share of commitments that goes on fees and expenses. A team doing three platforms a year at $28.0m, with 20 per cent reserves, needs $547.8m, a 1.83 times step-up on a $300m Fund III. Raising $650m on the same team means deploying for 5.9 years or writing $33.2m cheques, and limited partners will ask which.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A mid-market buyout firm is preparing Fund IV after a $300m Fund III. Investor demand looks strong and the placement agent mentions $650m. Investor relations has to defend a target in the first meetings, and the first diligence question will be how the number was built. All figures are illustrative.
| Input | Value |
|---|---|
| New platform investments a year the team can lead | 3.0 |
| Average equity cheque | $28.0m |
| Largest planned cheque | $45.0m |
| Investment period | 5 years |
| Follow-on reserves, share of platform equity | 20% |
| Fees and expenses over the life, share of commitments | 12% |
| Recycled proceeds reinvested, share of commitments | 4% |
| Concentration limit, single investment | 15% |
Platform capital = deals a year × average cheque × investment period = 3.0 × 28.0 × 5 = $420.0m
Follow-ons = 420.0 × 20% = $84.0m; capital to invest = $504.0m across 15 platforms
Deals a year is the binding input, and it is set by people, not by money: how many transactions the deal partners can lead, and how many boards the operating team can sit on, at the quality that produced the Fund III record. If the track record was built on two deals a year, three needs a hiring plan that LPs can see.
Not every committed dollar reaches a company. Management fees and fund expenses absorb part of commitments over the life, and recycling lets some early proceeds go back out. Here 12 per cent goes on fees and expenses and 4 per cent is recycled, so 92 per cent of commitments is investable.
Fund size = capital to invest / (1 − fees and expenses + recycling)
= 504.0 / (1 − 12% + 4%) = 504.0 / 92% = $547.8m
Excel: =B1*B2*B4*(1+B5)/(1-B6+B7)
The size has to sit comfortably with the concentration limit and with the prior fund. The largest planned cheque, $45.0m, is 8.2 per cent of $547.8m, well inside the 15 per cent limit, and the limit alone would allow a fund as small as $300.0m. The average cheque is 5.1 per cent of the fund, fifteen platforms with room for follow-ons. The step-up is 1.83 times. That is the figure LPs will compare with the firm's history and with what the team's headcount has done since Fund III, and the one investor relations needs to explain in a sentence.
| Deals a year | $22.0m cheque | $28.0m cheque | $34.0m cheque |
|---|---|---|---|
| 2.5 | 358.7 | 456.5 | 554.3 |
| 3.0 | 430.4 | 547.8 | 665.2 |
| 3.5 | 502.2 | 639.1 | 776.1 |
Reaching $650m needs a combination at the edge of this grid. Held at three deals, the investable $598.0m takes 5.9 years to deploy at the current cheque, beyond the investment period, or a $33.2m average cheque inside it. Held at $28.0m, it needs 3.6 platforms a year. Each of those is a change of strategy: bigger companies, a faster pace, or a longer investment period with fees running on undeployed capital. None is wrong, but each has to be presented as a decision with a plan behind it, not as a consequence of demand.
The fee arithmetic is why LPs probe the gap. At 2 per cent, $650m earns $13.0m a year against $11.0m on $547.8m. The firm's economics improve with size whether or not the returns do, so a target above deployment capacity reads as an asset-gathering decision unless the case is made.
The common mistake is to set the target top-down, from investor demand or the last fund times a customary step-up, and then build the deployment story to fit. The second is to stop at Step 1 and call $504.0m the fund size, forgetting that fees and expenses come out of commitments: that fund would run out of capital before its last planned follow-on. A third is to ignore reserves, which leaves platform companies without capital for the add-ons that a buy-and-build plan depends on. For a first-time or real estate fund with no prior vintage to step up from, the same deployment test is paired with a concentration floor and a fee floor in how to calculate the right size for a real estate fund; for a successor buyout fund the extra test is the step-up against the last vintage.
Once the target is set, the fundraising arithmetic takes over: how much the existing investors will bring back and how much new money is needed, as worked in what re-up rate a successor fund needs to hit its target, and how the pipeline converts, in the probability-weighted fundraising pipeline. The book's own fund, its measures and a blank version for yours are on the companion page with the free workbook.
There is no fixed norm, and the right test is whether the step-up follows from deployment capacity. Here three deals a year at $28.0m supports $547.8m, 1.83 times the prior $300m fund. If the team did two deals a year in Fund III, the step-up needs new deal partners or larger cheques, and LPs will ask to see both.
Less than all of them. Management fees and fund expenses absorb part of commitments over the life, and recycling adds some back. In this illustrative case 12 per cent goes on fees and expenses and 4 per cent is recycled, so 92 per cent is investable: $504.0m of investment needs $547.8m of commitments.
It must invest faster, write bigger cheques or take longer. On this team, $650m leaves $598.0m to invest: 5.9 years at the current pace, a $33.2m average cheque, or 3.6 deals a year. The management fee also rises, $13.0m a year at 2 per cent against $11.0m, which is why LPs probe a target above capacity.
This article is one calculation from Private Equity Investor Relations. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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