Hard cap
The maximum total commitments a fund will accept.
It is written into the LPA. Managers set it to protect strategy and returns, since a fund that grows too large may not be able to deploy well. A target size is the goal, and the hard cap is the ceiling.
Hard caps are often 20 to 50 percent above target size. When demand exceeds the cap, the GP must scale back allocations, usually favouring existing LPs, strategic investors and those who committed early.
Raising the cap usually requires amending the LPA with LP consent. LPs may resist if a larger fund would change the strategy, the deal sizes or the team's ability to manage the portfolio.
Worked example
A fund targets $100M with a $125M hard cap. Commitments reach $140M by the final close, so the GP scales back. Existing LPs from Fund I receive their full requests, and new investors are cut back by about 30 percent so total commitments equal $125M.
Common questions about hard cap
What is the difference between a target size and a hard cap?
The target is the amount a fund aims to raise. The hard cap is the legal maximum it may accept, written into the LPA, and is usually set above the target.
Why would a GP turn away capital above the hard cap?
Because a larger fund may not fit the strategy. More capital can mean bigger deals, more competition and a portfolio the team cannot manage well, which can hurt returns.