Capacity
Capacity is the amount of capital a strategy can deploy without degrading returns or weakening underwriting standards.
Allocator relevance: A key constraint on performance persistence and a major driver of manager selection and sizing decisions.
Expanded Definition
Capacity limits arise from market depth, deal availability, liquidity, underwriting bandwidth, and operational constraints. When a manager exceeds capacity, they may be forced into weaker deals, lower conviction positions, or increased leverage—often reducing future performance.
Capacity is strategy-dependent: some markets absorb large capital efficiently; others are alpha-constrained and degrade quickly with size.
How It Works in Practice
Allocators assess capacity through deployment pace, historical scaling behavior, pipeline depth, win rates, and resource scaling. They also evaluate whether a manager’s stated strategy can be executed at current and projected AUM.
Decision Authority and Governance
Hard caps, disciplined fundraising, and IC underwriting standards protect capacity. Governance should prevent asset gathering from overriding strategy integrity.
Common Misconceptions
- Larger funds are always safer.
- Capacity is only a market-size question.
- Strong past performance guarantees scalability.
Key Takeaways
- Capacity is both market- and team-constrained.
- Over-capitalization can quietly degrade performance.
- Hard caps can be a positive governance signal.