What Is Committed Capital?
Committed capital is the money that an investor has agreed to add to an investment fund. The term is ordinarily utilized comparable to alternative investments, for example, venture capital (VC) and private equity (PE) funds.
In contrast to publicly traded instruments, for example, exchange-traded funds (ETFs), VC funds and other alternative investments are generally illiquid. In that capacity, their managers depend on investors' committed capital to guarantee they have adequate resources to fund their acquisition pipeline and administrative expenses.
Committed capital ought not be mistaken for capital commitment, which is the point at which a broker-dealer or investment bank consents to take part in a client trade utilizing the firm's own money.
Figuring out Committed Capital
Investors who wish to contribute funds to alternative investment firms generally accept that they will partake in a higher risk-adjusted return than is conceivable in more traditional asset classes. Yet in seeking these benefits, investors must be prepared to acknowledge more restrictive terms.
PE-type funds generally offer less oversight than their traditional peers and furthermore expect investors to commit ahead of time to their capital contributions. These contributions can either be made upfront or over an endless supply of time. The size of these contributions is likewise a lot bigger than in most investment vehicles, with least contribution measures regularly above $1 million.
Traditionally, investors who commit capital to PE funds will have several years to follow through with the commitment. Failing to do so can lead to penalties, like the forfeiture of a portion of the investor's share of future profits. Now and again, the culpable investors may likewise be required to sell their interest in the fund, either to other existing partners or to approved outsiders.
Under most agreements, investors will have a certain time span in which to supply committed capital.
How Committed Capital Is Used
Depending on the structure of the fund, committed capital might be allocated toward specific investments or it very well may be drawn into a universally useful fund called a blind pool. In the last scenario, the investor won't be aware ahead of time which exact investments their capital will be utilized to fund. All things being equal, they will just realize the overall strategy being sought after, passing on the subtleties to be organized by the fund managers.
In different cases, funds will reveal the specific acquisitions for which they are raising capital, alongside their overall strategy. In this case, investors can choose if they wish to partake in funding every specific project. In the event that they accept that the strategy is captivating however are less energetic about the next acquisition in the fund's pipeline, they can postpone making their contribution until they are given a really compelling option inside that strategy.
This method of investing is generally preferred by investors who value a greater feeling of control. Then again, it might possibly sabotage fund performance by restricting the fund managers' ability to act astutely looking for the highest conceivable investment returns.
Illustration of Committed Capital
Assume you are the owner of XYZ Capital, a PE firm specializing in mature industrial companies in the Pacific Northwest. In attracting investor capital, your fund gives point by point data with respect to its investment strategy, including instances of past acquisitions and a timetable of expected future acquisitions.
As opposed to raising capital on a per-acquisition basis, nonetheless, your fund-raises into a blind pool. Your investors then trust that you will dispense their capital into investments that are steady with the agreed-upon strategy, without expecting to survey and endorse every individual investment.
To carry out this fundraising model, you request that committed capital be paid whenever inside a one-to three-year window following the inception of the fund. Least contribution sizes are set at $1 million. On the off chance that investors fail to deliver their contributions on time, they may be required to sell their stake in the fund to an approved party.
When collected, the committed capital is then used to finance the arranged investments as well as to cover administrative expenses, for example, fees, salaries, travel expenses, and due diligence costs.
- Committed capital is the money that an investor vows to add to an investment fund.
- Committed capital is regularly used to fund investments as well as administrative costs.
- It is frequently associated with alternative investments, for example, VC and PE funds, which require committed capital due to their illiquid nature.