What Does Committed Capital Mean?
Committed capital is the legal agreement entered into between a private equity (PE) fund and investors that requires the latter to contribute money towards the PE fund. The investor, though, has the option to pay the agreed capital at one time or to make specified contributions over the entire period.
These terms are present in the legal agreement signed by both parties.
Divestopedia Explains Committed Capital
Committed capital can take many forms. Investors can enter into an agreement with a private equity fund to contribute money towards a 'blind pool,' where the exact purpose is not known to investors at the time of investing. Such a fund gives managers greater flexibility for investors so that they can invest when an opportunity presents itself. This flexibility helps the fund managers to earn a higher internal rate of return (IRR), which benefits investors.
Another type of committed capital is when investors contribute money towards a particular fund that is meant for a specific objective. The fund managers make a call about the specific amount of money needed for an investment and the investors make contributions accordingly. Since the purpose is defined, investors know what they are getting into, so they can decide their commitments accordingly. Many investors prefer this type of committed capital because it helps them to align their investments with their personal goals.
If the investor fails to meet his/her contractual obligations, then that investor is likely to be subjected to fines and penalties, depending on the terms of the agreement. Some possible penalties include preventing the investor from participating in future investments and charging interest on the unpaid amount.
Sometimes financial buyers will approach business owners as prospective buyers for their business. A business owner should investigate the committed capital of the private equity fund because it will help assess the ability of that fund to close the transaction and how they will act as partners after the deal is closed.