Key Takeaways
- This article is for informational purposes only and does not constitute legal advice. Reading it does not create an attorney-client relationship with Faison Law Group.
- A lockup provision restricts an investor from redeeming (withdrawing) their capital from a fund for a set period after they invest.
- Lockups exist to protect the fund, not to punish investors, without one, a fund manager can’t deploy capital into longer-term positions with confidence.
- Faison Law Group builds lockup terms into fund formation documents so managers can plan capital deployment and investors know exactly what they’re agreeing to.
- Lockup length and structure should match the fund’s strategy, a fund holding illiquid assets needs a longer lockup than one trading liquid securities.
- This is Part I of a two-part series on investor redemptions. Part II covers redemption gates and the mechanics of processing withdrawal requests.
What a Lockup Actually Does
When an investor commits capital to a fund, that capital doesn’t just sit in a bank account waiting to be pulled back out on demand. A fund manager deploys it: into positions, into deals, into strategies that take time to mature. A lockup provision is the mechanism that keeps that capital in place long enough for the strategy to work.
In plain terms: a lockup says an investor cannot request a redemption for a defined period after making their investment. Common lockup periods run anywhere from six months to several years, depending on the fund’s strategy and asset class.
Without a lockup, a fund manager is exposed to a real risk, investors pulling capital at the first sign of a rough quarter, forcing the fund to sell positions at the worst possible time just to meet redemption requests. That’s not hypothetical. It’s the exact scenario that sinks funds holding illiquid or long-horizon assets.
This section and all content below offers general information only and is not legal, tax, or investment advice. Outcomes depend on individual facts and circumstances, and you should consult qualified counsel for guidance specific to your situation.
Why Investors Should Actually Want This Too
It’s tempting to think of a lockup as something that only benefits the fund manager. It doesn’t. A lockup protects every investor in the fund, including the one being asked to accept it.
If capital can walk out the door on demand, the fund manager has to keep a larger cash cushion sitting idle instead of deployed, which drags on returns for everyone. Worse, in a downturn, the investors who redeem first get paid at the expense of the ones who stay, because the manager may need to sell the fund’s best assets first just to raise cash. A properly structured lockup keeps the playing field even and lets the manager run the strategy the fund was actually built for.
Matching the Lockup to the Fund’s Strategy
There’s no universal “right” lockup length. The right structure depends entirely on how liquid the fund’s underlying assets are.
- Illiquid strategies (real estate, private equity, venture capital, direct lending) typically warrant longer lockups, often multi-year, because the underlying assets themselves can’t be sold quickly without a loss.
- Semi-liquid strategies (certain credit or hybrid funds) often use a hard lockup for an initial period, followed by a softer redemption window with notice requirements and possible early-withdrawal fees.
- Liquid strategies (funds trading publicly traded securities) may use a shorter lockup or none at all, relying instead on redemption gates and notice periods to manage liquidity, the subject of Part II in this series.
Getting this match wrong in either direction creates problems. Too short a lockup for an illiquid strategy sets up a liquidity crisis down the road. Too long a lockup for a liquid strategy can make the fund harder to raise capital for in the first place, since sophisticated investors will ask why.
Hard Lockups vs. Soft Lockups
Not all lockups work the same way, and the difference matters when you’re drafting the fund’s governing documents.
A hard lockup means redemptions are simply not permitted during the lockup period, full stop, with no early-exit mechanism. A soft lockup permits early redemption, but attaches a cost to it, typically a redemption fee that declines the longer the investor stays in. Soft lockups are more investor-friendly and can make fundraising easier, but they require the fund’s offering documents to spell out the fee schedule precisely, or the fund manager risks disputes over what an investor thought they signed up for.
Faison Law Group’s Approach
We draft lockup and redemption terms as part of a fund’s core formation documents — subscription agreements, limited partnership agreements, and offering memoranda — so the terms are consistent, enforceable, and clearly disclosed to every investor from day one. As a boutique transactional firm, we don’t handle disputes after the fact. We build the lockup terms carefully enough that a dispute doesn’t happen in the first place.
Related Resource
For background on how fund managers structure investor terms more broadly, see the Fund Formation practice page.
Frequently Asked Questions
Can an investor negotiate their own lockup terms?
Sometimes, through a side letter — but side letter terms need to be drafted carefully so they don’t create most-favored-nation issues with other investors in the fund.
What happens if an investor tries to redeem during a hard lockup?
The fund isn’t obligated to honor the request. The governing documents should spell out exactly what recourse, if any, exists in that situation.
Do all funds need a lockup?
No. Highly liquid funds may rely on redemption gates and notice periods instead. The right structure depends on the fund’s strategy and underlying asset liquidity.
What’s coming in Part II of this series?
Part II covers redemption gates: the mechanics funds use to manage how much capital can be withdrawn at once, even after a lockup period ends.
Structuring redemption terms for a new fund? Schedule a free 15-minute consultation with Faison Law Group. Call (667) 423-5625 or contact us online.
This article is for informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship with Faison Law Group or any of its attorneys.