Fund management

Author:

Rita Astoor

|

Read time:

7 minutes

Published date:

13 January 2025

Understand the key components of fund management for private equity and venture capital funds. We'll cover how fund management works throughout a fund's lifecycle—from capital allocation, risk management, portfolio company oversight, asset management, and fund administration.

Contents: Download the First Time Fund Manager Checklist

What is fund management?

Fund management is the process of raising and overseeing investment funds that pool capital from multiple investors. Most private equity and venture capital investment funds are structured as limited partnerships with at least one limited partner (LP), who invests money into the fund, and at least one general partner (GP)—usually an entity—that manages the fund. Within the context of VC and PE, fund managers (the GPs) use these pools of capital to acquire stakes in private companies, with the goal of selling those stakes in the future and returning the profits to their investors (the LPs).

The lifecycle of a fund

From the time a fund manager starts to raise a fund to whenever they exit their last investment, the lifecycle of a VC or PE fund often stretches to a decade or longer. At different stages of this fund lifecycle, fund managers typically focus on different tasks. In the early years of a fund, the manager will be more focused on raising capital and capital deployment. In later years, the fund manager’s role shifts toward fostering growth at their portfolio companies and pursuing potential exit strategies.

The role of a fund manager

The fund manager (the management company) formally is the legal entity responsible for making decisions on behalf of the private fund. But the fund manager usually “outsources” support, research, and analysis of investment decisions to the management company, a separate legal entity. Management companies vary widely in size, from global firms with hundreds of employees to solo-investment shops. Thus, fund managers can vary widely in the amount of support they receive.

The ultimate purpose of the fund manager is to be a responsible steward for their LPs’ capital and provide those LPs with a financial return. In VC and PE, fund managers generate returns by investing in private companies, using the combination of their LPs’ capital and their own business expertise to help those companies grow and exit.

In a more concrete sense, the role of the fund manager is manifold. Ultimately, every aspect of a VC or PE fund falls under the fund manager’s authority. Some of the key responsibilities include capital allocation, risk management, portfolio company oversight, asset management, and fund administration.

Private equity fund management

The broad strokes of fund management often look the same across different asset classes. But the details of the process can vary depending on the type of fund.

Raising capital

Most private equity firms raise the capital for their funds from multiple LPs, often dozens of different investors. These LPs come in many different forms, but mainly consist of institutional LPs like university endowments, public pensions, and sovereign wealth funds, as well as high-net-worth individuals.

Fund managers often spend many years building and nurturing relationships with both current and potential LPs. Raising capital from these LPs is the lifeblood of any private fund manager: Without capital, it’s impossible to make new investments.

Deal sourcing and due diligence

After raising capital for a fund, the next phase of the fund management cycle is to decide how to spend that capital. The process of searching for investment targets is known as deal sourcing. After a fund manager identifies a potential investment, they perform due diligence, which involves researching the target company’s market, finances, operations, and management.

Value creation

After acquiring a target, PE fund managers turn their attention toward increasing the company’s value in order to eventually position it for a profitable exit.

Portfolio management

Portfolio management is a subset of fund management that involves ensuring that your investment strategy and the actual investments you make are in line with one another.

Exit strategies

After owning a portfolio company for some period of time—often between three and seven years for private equity—fund managers typically look for a way to exit their investment and return capital back to their LPs. In PE, the most common exit strategy is M&A, where a fund manager sells a portfolio company to a new buyer, either a corporation or another investment firm. The other most popular exit strategy in PE is for the portfolio company to conduct an initial public offering (IPO).

Venture capital fund management

Venture capital fund managers differ from private equity fund managers in the type of investments they make: Most VCs target minority investments rather than majority investments in private companies, and those companies are typically earlier in their lifecycle.

Raising capital

Since VC fund managers tend to make minority investments in young startups, they often have lower capital needs and thus tend to raise smaller funds than their peers in private equity.

Deal sourcing and due diligence

The process of sourcing deals and conducting diligence is similar across PE and VC: In both cases, fund managers rely on their networks and their own research to locate interesting companies and determine whether it makes sense to invest. However, fund managers in these two asset classes are typically prospecting different populations of companies: PE firms typically invest in larger, more mature private companies, while VC firms look for potential investments among earlier-stage startups.

Value creation

The most important aspect of fund management for a VC is helping create value at their portfolio companies. For VC fund managers, most of this value creation comes in the form of helping young companies grow and expand, rather than major strategic changes or financial restructurings.

Portfolio management

While VC fund managers can help companies with value creation, after making an investment, they typically have less control over the company’s future than PE fund managers. This is because VCs make minority investments, while PE firms pursue majority deals.

Exit strategies

As in private equity, the most common exit strategies for VC fund managers are an M&A transaction or an IPO.

Key differences between PE and VC fund management

Fund management software

Many fund managers rely on software to help organize and administer their investments. Carta provides an end-to-end platform that’s custom built to help private fund CFOs manage every aspect of their funds, from calling capital to tax return preparation to assessing fund performance.

Download the First Time Fund Manager Checklist

Our free checklist breaks down the key steps you need to follow to launch your first VC fund.

Author: Rita Astoor

Rita Astoor is the Director of Carta’s Venture Capital & Private Equity Business Development team. She also teaches a course on Venture Funds at UC Berkeley School of Law. Prior to joining Carta, Rita was a practicing investment fund attorney.