Capacity

Definition

Capacity refers to how much AUM a strategy can manage while maintaining its edge. Capacity limits are driven by market liquidity, deal size availability, competitive dynamics, and operational bandwidth. Exceeding capacity can lead to weaker entry points, reduced selectivity, style drift, or increased correlation to broader markets. Allocator Context Allocators evaluate capacity to understand sustainability of performance. They look for evidence that the opportunity set can support the fund’s target size and that the manager has discipline to close or cap the fund when necessary. Capacity is especially important in niche strategies, small-cap public markets, and specialized private themes. Decision Authority Capacity considerations influence commitment sizing and can shape IC decisions, particularly when a manager is growing rapidly or raising larger funds. Allocators may reduce allocations if they believe the strategy is past its effective capacity. Why It Matters for Fundraising Managers who can articulate capacity constraints credibly signal discipline. This improves trust, supports premium positioning, and reduces concerns about future performance dilution. Key Takeaways Capacity is a performance sustainability issue Exceeding capacity often causes drift and weaker outcomes Discipline and clarity improve allocator trust A key driver of allocation sizing decisions