What Happens to a Fund When a Company Exits

When you invest in a private company through a single-asset fund — also known as an SPV — you generally don’t own the underlying company shares directly. The fund owns the underlying security, and you own an interest in the fund. When a company exits, it sets off a chain of events for the fund manager and its investors.

Types of Company Exits

An exit triggers a fund to begin its distribution process, which is one way that investors realize the value of their fund units. Until an exit, those holdings are typically illiquid, unless an investor is able to resell their fund stake on an institutional-grade investing platform like Mirai Capital.

Companies achieve an exit in three main ways:

• Initial public offering (IPO): The company lists its shares on a public stock exchange for the first time. It typically partners with investment banks on a “roadshow” to pitch the business to prospective investors, gauge demand, and may use that interest to set an offer price and share allocation.
• Acquisition or merger: Another firm buys the company. The buyer may pay in cash, its own stock, or a mix of both. This is one of the most common ways private companies exit.
• Direct listing: The company lists its existing shares on an exchange without raising new money or using the underwriting process of a traditional IPO. Existing shares become eligible to trade on a public exchange.

Lockup Periods

When a company goes public, shareholders — including funds that hold shares in the underlying stock — usually can’t sell their shares right away. This is known as the lockup period: a set amount of time after the IPO where investors are blocked from selling or transferring their shares. This period is commonly 90 to 180 days. Whether a lockup period is implemented and how long it runs is typically determined either by the company itself in consultation with its major institutional shareholders, or — in the event of an IPO — the banks that underwrite the public offering.

Lockups aim to manage the “float”: the percentage of the shares in the company that are able to be traded. If everyone who held shares before the IPO could sell on day one, the sudden flood of supply could drive the price down. The lockup period spaces out when those shares can reach the market.

Lockups matter for investors because they delay the moment the fund manager can act. Even after the company is public and the shares have value on paper, the fund often has to wait before it can sell or distribute shares. Investors’ shares may be unlocked in tranches rather than all at once, or a lockup timeline might release early if the stock trades above a certain threshold. A company’s lockup terms are typically described in the “Shares Eligible for Future Sale” and “Underwriting” sections of its S-1 prospectus, with the full lockup agreement often filed as an exhibit.

SEC Rule 144

The Securities and Exchange Commission’s Rule 144 may apply to shares held by funds, depending on the transaction. Generally, the SEC requires a one-year holding period before restricted securities of a private company can be sold publicly, though that holding period is generally reduced to six months once the company becomes subject to SEC reporting requirements. The clock starts when the shares were originally acquired and paid for, not at the IPO or acquisition date. The rule operates independently of any company- or underwriter-imposed lockup, which may increase the holding period for certain investors or shares.

If the underlying company or a fund holding its shares merges or reorganizes before that time is up, whether the holding period carries over to the new shares depends on how the deal was structured. Investors with questions about their holdings should consult qualified counsel.

How Funds Are Distributed

Once a fund converts its holdings into cash or publicly tradable shares, it can return that asset to its investors. This process is known as a distribution, and it’s how investors realize the potential value of their investment.

Fund Distribution Methods

Funds distribute value in various ways, in line with their operating agreements:

• In-kind distribution: The fund’s private shares in the company become public ones, with the fund distributing shares directly to investors according to their ownership interest and the terms of the fund agreement. Each investor then individually decides when and whether to sell.
• Cash distribution: The fund sells its newly public shares or receives cash from an acquisition, depending on the exit type. It passes that cash on to investors.
• A mix of cash and shares: This method is more common when an acquisition pays partly in cash and partly in the buyer’s stock. The fund distributes the cash and shares through to investors.

Distribution Considerations

A few variables shape how a distribution happens:

• Control shifts with the method: With cash distribution, the fund coordinates selling the stock. In an in-kind distribution, that job passes to the investor, along with the risk or benefit that the price moves before they sell.
• Fees: Depending on the terms of the fund, investors may be charged fees before distribution. These fees can vary significantly between funds and do not follow a standard naming convention. Depending on the fund structure, the most common fees include management fees, carried interest, administrative fees, and a distribution fee.
• Returns are not guaranteed: A distribution is only as large as the exit allows. If the company exits at a lower value than expected, investors may receive less than they originally put in.

When Funds Are Distributed

A fund’s structure impacts when investors can expect their distributions.

Single-Layer Funds

A single-layer fund holds the company’s shares directly, and its name sits on the company’s cap table. After any lockup period expires and applicable securities law requirements are satisfied, the fund can sell its shares or distribute them to investors.

If a Mirai Capital fund, Mirai Capital partner fund, or externally managed fund on the platform holds the investment directly, it will begin distribution to investors when any lockup period set by the company expires. Mirai Capital will reach out in advance to let investors know when they could expect their shares to be unlocked.

Double-Layer Funds

A double-layer fund adds a second layer between the investor and the company. In this setup, the lockup obligations sit with the layer that holds the shares directly and is bound by the company’s rules. After the lockup ends, the exit unwinds in stages. The layer holding the shares sells or distributes first, then passes the proceeds up to the second-layer fund, which in turn releases them to its investors. With this structure, distributions can take longer than they would in a single-layer fund.

If an investor holds exposure to shares in a double-layer Mirai Capital fund or externally managed fund on the platform, Mirai Capital is dependent on the underlying fund manager releasing any proceeds before it is able to distribute to investors. Mirai Capital will let investors know the specific release schedule and anticipated timelines as soon as it receives confirmation from the underlying fund manager.

US Tax Considerations

Taxes can play a big role in what investors keep after an exit. How much you may owe depends on your personal circumstances, where you live, the type of exit, and how the fund and the deal are structured.

Many private funds are set up as Limited Liability Companies (LLCs) or partnerships. In general, this means the fund itself does not pay income tax. Instead, gains and income typically pass through to investors, who report them on their own tax returns.

Cash distributions may be subject to capital gains tax, which could be either long- or short-term, depending on how long the fund has held the investment. For in-kind shares, the investors typically retain the fund’s holding period and receive a carryover basis — meaning they inherit the original purchase price of the share rather than the share’s current value. Whether or not the distribution itself is taxable depends on the structure of the fund and applicable tax rules.

Different types of investors can face different tax treatment. An individual, a retirement account, a tax-exempt organization, and a foreign investor may each be taxed differently on the same distribution. To understand your own situation, it’s worth consulting with an expert.