Another important source of diversification in private equity is by vintage year. The private equity market is built around single-use, closed-end funds; so the capital is used once, invested over the course of four, five or six years, after which the harvesting of those investments begins. Within a 10- or 12-year period, capital goes in once, is invested once, then is returned once. The vintage year, or date on which a fund begins, is thus a critical determinant in the outcome, says FW Capital's Steven Baker.
For example, a buyout fund's outcome has a lot to do with the nature of the debt markets from the beginning of the fund through its investment period, on whether there's a recession, and on whether the public markets have been receptive to an exit during the second half of the fund's life. If the IPO market is very good, that will generally help all funds of that vintage coming into the harvesting period. If the public markets are bad for IPOs, then funds of that vintage will generally have a similar experience trying to get out of a company.
FW Capital tries to provide its clients with at least three years of vintage year diversification, says Baker. The result for investors in its funds of funds is 15 to 25 funds invested across three vintage years, diversified by venture and buyout, some special situations and some access to international.