What is 'Committed Capital'

Committed capital (also known as "commitments") is a contractual agreement between an investor and a venture capital fund that obligates the investor to contribute money to the fund. The investor may pay all of the committed capital at one time, or make contributions over a period of time. This often takes place over a number of years.

BREAKING DOWN 'Committed Capital'

When an investor commits capital to a venture capital fund, the investor typically has many years to satisfy the agreement. Often, contributions will be made over a period of three to five years after the fund is formed. Committed capital may be used by fund managers as a vehicle to cover investments or fees, by calling for contributions as needed to be deposited in the fund within a certain agreed upon timeframe.

The private equity market can be viewed as riskier than the public equity market, as returns in the private market tend to have higher dispersion of returns than the public market. Therefore, investing in the right business ventures can offer substantial rewards for top tier funds.

How Committed Capital Is Used

Committed capital may be put toward a so-called blind pool where the investor does not know specifically how or where the money is to be invested. Such an arrangement offers fund managers leeway to make investments as they deem appropriate in order to better generate high internal rates on return for the investors. When a fund pursues investments, such as offering to acquire a business, the amount of committed capital may be seen by the business owner as a way to gauge the ability of the fund to follow through with the offer.

As committed funds are called upon to make investments, the contributing investors will be granted a portion of the overall returns the investment brings to the fund. While committed capital does not indicate immediate liquidity, it can demonstrate a fund’s capacity to pursue and fulfill deals.

The terms of the agreement for committed capital usually include penalties and fees if the money is not contributed by the designated time by the investor. This can include interest charges on the capital that has not been contributed on time as well as further action that limits or even eliminates the derelict investor's further participation in the fund. In such cases, the investor may be limited in terms of profits they may recoup from the fund. The investors may also be forced to sell their interest in the fund to partners in good standing or possibly to third parties. 

RELATED TERMS
  1. Capital Commitment

    Capital commitment is future capital expenditures that a company ...
  2. Venture Capital Funds

    Venture capital funds invest in early-stage companies and help ...
  3. Firm Commitment

    A firm commitment is an underwriter's agreement to assume all ...
  4. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
  5. Loan Commitment

    A loan commitment is a loan from a commercial bank or other lending ...
  6. Committed Facility

    A committed facility is a credit facility whereby terms and conditions ...
Related Articles
  1. Investing

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  2. Investing

    Liquidation Blues: When Mutual Funds Close

    Underperforming mutual funds can be liquidated, leaving investors down and out.
  3. Financial Advisor

    Top 5 American Funds for Retirement Diversification in 2016

    Discover five mutual funds from industry leader American Funds with high yields that are perfect for retirement savings diversification.
  4. Investing

    2016's Most Promising Money Market Funds

    Learn information on some of the most promising money market mutual funds for investors to consider adding to their portfolio in 2016.
  5. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  6. Investing

    Mutual Funds: Does Size Really Matter?

    The growth of mutual funds isn't always cause for celebration. Read on to find out why.
  7. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  8. Investing

    A Guide For Picking Long Term Mutual Funds

    Learn about considerations for investors when buying shares in a mutual fund for a long-term investment, including fees, type of management and portfolio goals.
  9. IPF - Banking

    What Is A Money Market Fund?

    Learn how money market funds provide security, but the returns may not be adequate for long-term investors.
RELATED FAQS
  1. How does total capital investment influence economic growth?

    Discover the basic relationship between capital investment and economic growth, and why improving the capital structure increases ... Read Answer >>
Trading Center