Of everything that surprises investors about private deals, the one that catches them off guard most often is how hard it can be to get back out. A public stock, you sell whenever you feel like it. A syndication, a fund, or most private placements are nothing like that. Your capital is committed, frequently for longer than you were led to expect, and in some cases with no realistic way out at all.
So before you invest, ask yourself one question and make sure you can answer it: under what circumstances, and on what timeline, do I actually get my money back? The answer is spelled out in a few specific places.
The Expected Hold Period
Most deals come with a target hold, commonly five to ten years in real estate and private equity, after which the sponsor expects to sell or refinance and hand capital back. Keep two things in mind. The hold is a plan, not a promise. And it tends to run longer than projected when conditions sour. I’ve watched plenty of five-year deals turn into seven- or eight-year ones.
Redemption Rights (If Any)
Some funds run a redemption or withdrawal program that lets you ask for your capital back before the term ends. Read these closely, because the conditions attached to them are where the real story is:
- Lockup periods before any redemption is permitted;
- Caps on how much can be redeemed in a given quarter or year;
- Manager discretion to deny or delay requests; and
- Gates that let the manager suspend redemptions outright, which sponsors tend to do at precisely the moment a crowd of investors all want out at once.
Pile enough conditions on a redemption right and it can come to almost nothing. The fact that a program exists doesn’t mean you can count on it when you need it.
Transfer Restrictions
Can you just sell your interest to someone else? Rarely, and not freely. Operating agreements usually restrict transfers outright, require the manager’s approval, hand the sponsor or other investors a right of first refusal, and layer on conditions meant to protect the offering’s securities-law status. A secondary market does exist for some private interests, and it’s growing, but it’s thin and sales there often go at a discount. Treat illiquidity as the base case and you won’t be disappointed.
Capital Events: The Real Exit
For most deals the genuine exit is a capital event — the sale or refinancing of the underlying asset. That’s when your capital comes back to you, along with your share of the profits under the distribution waterfall. Which means your liquidity is tied to the sponsor’s judgment about when to sell and to whatever the market is doing at that time, neither of which is in your hands. Watch as well for a forced-exit or “drag-along” provision that can pull you into a sale on the majority’s terms whether you like them or not.
Match the Lockup to Your Life
The practical lesson here isn’t complicated: don’t put in money you might need before the deal’s expected exit, then build in a margin on top of that, because exits slip. Illiquidity is the cost of getting into private markets. It’s a fair price for capital you can genuinely leave alone for years. It turns into a real problem only when life changes on you and you go looking for the exit that isn’t there.
Pinning down the specific exit, redemption, and transfer terms in your own documents — the actual provisions, not the marketing timeline — is part of what a legal review sorts out before you lock up your capital.
Investor Diligence is a service of Waypoint Law PLLC, a Minnesota-based law firm serving investors nationwide. This article is for informational purposes only and is not legal or financial advice, and reading it does not create an attorney-client relationship. Investment decisions are yours to make.
Want to know exactly how and when you can exit your deal? Get a legal review of your investment or schedule a discovery call.