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.