Committed Capital

What is committed capital?

Committed capital is the total that investors have contractually promised a fund, whether or not the money has been transferred. It is the number quoted as fund size. ILPA's glossary defines it as the total dollar amount of capital pledged to a private equity fund; in practice that pledge is a binding, unconditional obligation to fund when called.

Committed, called, contributed, remaining

Four words describe four different balances, and the fund's own documents keep them separate.

• Committed capital, or commitment. The full amount an investor has agreed to provide over the fund's life.
• Called capital, also contributed or paid-in capital. What the fund has drawn and the investor has actually wired.
• Remaining or undrawn commitment. Committed less contributed, which is the fund's unfunded firepower.
• Recallable amount. Distributions that increase undrawn commitment again, so they can be drawn a second time.

TCW Spirit Direct Lending's operating agreement makes the arithmetic explicit. Each common unit represents a commitment of $100 and is issued for $0.01, obligating the holder to make additional future capital contributions of $99.99. Undrawn commitment equals $100 less the aggregate contributions made or deemed made on the unit, with three adjustments: it is not reduced by NAV balancing contributions, and it increases both for certain distributions attributable to true-up contributions and for recallable amounts.

That last point is the one most summaries miss. Undrawn commitment is not a number that only falls. A return of capital can push it back up, and the investor's obligation with it.

How a commitment becomes cash

The commitment is drawn by notice, not on a schedule. Under the TCW agreement the fund may draw down capital from each member up to that member's undrawn commitment, and each member agrees to contribute the called amount by the date in the notice, which must be at least ten business days after the notice is dispatched, reduced to five business days for the initial drawdown on newly issued units.

Because the obligation is unconditional, an uncalled commitment is a financeable asset. New Mountain Guardian IV BDC's subscription facility with BMO Harris Bank is sized as a percentage of the fund's remaining capital commitments, a percentage the loan documents call the advance rate. The fund's certificate to the lender states that the fund's outstanding indebtedness and similar obligations do not and will not exceed 55 percent of the fund's remaining capital commitments, and that availability is subject to change at the lender's discretion on notice. The same certificate requires the fund to report, line by line, the aggregate amount of capital commitments, remaining capital commitments, contributed capital made by the members, and drawdown notices issued since the last quarter end.

The lender also reaches through to the investors. Under a typical subscription-line arrangement the members consent to the pledge of their undrawn commitments and confirm that they remain absolutely, irrevocably and unconditionally obligated to fund capital contributions pursuant to written capital call notices, which is exactly what the TCW agreement's member acknowledgements provide.

A worked example with the arithmetic shown

Assume a hypothetical fund with $250,000,000 of committed capital that has called 35 percent of commitments, and a hypothetical investor who committed $10,000,000. All figures here are hypothetical.

• Investor's share of the fund. $10,000,000 divided by $250,000,000 equals 0.04, or 4.0 percent.
• Fund called to date. $250,000,000 times 0.35 equals $87,500,000.
• Fund remaining commitments. $250,000,000 less $87,500,000 equals $162,500,000.
• Investor contributed capital. $10,000,000 times 0.35 equals $3,500,000.
• Investor remaining commitment. $10,000,000 less $3,500,000 equals $6,500,000.

Now add the fee layer, using a 2 percent management fee charged on committed capital during the investment period.

• Annual fee on the investor's commitment. 0.02 times $10,000,000 equals $200,000.
• That fee as a share of money actually in the ground. $200,000 divided by $3,500,000 equals 0.0571, or 5.71 percent of contributed capital.

And the borrowing layer, applying the 55 percent advance rate above to the fund's remaining commitments.

• Subscription-line capacity. $162,500,000 times 0.55 equals $89,375,000.

Re-check each figure. 10,000,000 / 250,000,000 = 0.04. 250,000,000 x 0.35 = 87,500,000, and 250,000,000 - 87,500,000 = 162,500,000. 10,000,000 x 0.35 = 3,500,000, and 10,000,000 - 3,500,000 = 6,500,000. 0.02 x 10,000,000 = 200,000, and 200,000 / 3,500,000 = 0.0571. 162,500,000 x 0.55 = 89,375,000.

The 5.71 percent line is the whole reason commitment-based fees are contested. It is not a 2 percent fee early in a fund's life; it is 2 percent of a number far larger than the capital at work.

What ILPA recommends about the fee base

ILPA Principles 3.0 does not simply endorse commitment-based fees. Its guidance on the basis for the management fee is that during the investment period, managers should determine the appropriateness of a commitment-based fee relative to operating costs and market dynamics, and that managers and investors may consider a bifurcated fee reflecting a blended percentage of committed and invested capital. After the investment period ends, the fee should step down to a percentage of unrealized cost. Managers running one or more predecessor funds should consider basing initial fees on a follow-on fund on invested rather than committed capital.

ILPA adds two guardrails that bear directly on committed capital. Where a subscription line is used to fund fees, expenses and early investments, the methodology for treating amounts drawn from the facility but not yet called from investors in the fee base should be transparent and consistent. And the investment period should be clearly defined in the fund documents, to avoid ambiguities that prolong it and generate excessive fees.

Where it shows up in documents

In the limited partnership or operating agreement, the commitment and drawdown mechanics sit in the capital article. In the TCW agreement they are in Sections 6.1.1 through 6.1.3, with Commitment, Undrawn Commitment and Recallable Amount all defined terms collected in an appendix.

In lender-facing documents the same figures appear as reporting lines. New Mountain's certificate of status, attached to the increase letter as its amended Exhibit B, itemizes aggregate capital commitments, remaining capital commitments, contributed capital, outstanding indebtedness, guarantees and contingent obligations, drawdown notices since the last quarter end, and the stated termination date of the investment period.

Two practical reading notes. Fund size headlines are stated in committed capital, so a fund that has "raised" an amount has usually received almost none of it. And the investment period's stated end date is the single most load-bearing date in the agreement, because it governs both what can still be drawn for new investments and when the fee base changes.

Common mistakes

Reading committed capital as cash available now. The fund holds essentially none of it. Treating fund size as deployable cash overstates near-term capacity and understates the investor's future liquidity needs.

Assuming remaining commitment only shrinks. Recallable distributions and returned true-up contributions both push it back up.

Netting a subscription line against called capital. Money borrowed against uncalled commitments is not called capital, and how it is treated in the fee base is a disclosed policy choice, not an accounting fact.

Comparing fees across funds on the headline percentage. A 2 percent fee on commitments, a 2 percent fee on invested capital, and a bifurcated blend are three different prices, and only the second tracks capital at work.

How it relates to adjacent terms

Called capital is the same commitment after the wire clears, and the gap between the two is the number every investor models for liquidity.

A capital call is the instrument that moves capital from one bucket to the other, and its notice period, ten business days in the agreement cited here, sets how quickly a fund can actually deploy.

Dry powder is the industry's informal name for remaining commitments across a fund or a market. It is the same quantity the lender calls remaining capital commitments and prices at an advance rate.