Permian | Commitment
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Commitment

COMMITMENT 

These terms are explained from a general financial point of view, but also with a more particular relationship to the private equity fund industry.

Commitment

Many funds are set up as legal structures where all or part of the fund capital may be kept by the investor until needed and therefore called (Capital Call) by the fund. The term Commitment is used to describe that the investor has made a commitment to finance the fund up to and including a certain amount of money (see GP and LP Commitment).

GP ( General Partner) Commitment

Refers to the amount the GP commit to invest in the fund. The Limited Partners (LP’s) typically request that the GP’s invest substantially in the fund they are raising. Usually, the GP commitment needs to be at least one percent of the total committed capital.

LP (Limited Partner) Commitment

Refers to the amount the LP has committed to invest in a fund. The liability of the Limited Partner is typically limited to their Commitment, as opposed to the liability of the General Partner which is normally without limit. In practice therefore, the General Partner is normally set up as a limited liability company.

 

It is not uncommon that the General Partner of the fund may have the authority to draw an additional amount over and above the stated commitment and may also request returned amounts previously distributed. If so, the conditions for such actions will be detailed in the LPA.

Outstanding Commitment

Having Committed Capital to a fund structure, an investor will upon the receipt of a Capital Call notice, in accordance with the Limited Partnership Agreement (LPA), be required to pay money into the fund up to an amount equalling his Commitment. The Outstanding Commitment, is the amount paid inn to the fund at any given time, less repayments of capital and distributions.

 

Private equity funds will normally operate with low cash balances and will not draw down the total amount committed from investors at once. The investor is free to invest the remaining part of his Commitment elsewhere, always keeping in mind that the fund may issue Capital Calls at relatively short notice. The General Partner will also want to keep Outstanding Capital low because the waterfall mechanism typically stipulates that the investor shall receive an annual return (Hurdle Rate) calculated on his Outstanding Commitment from time to time, before the General Partner may receive any Carried Interest.

Undrawn Commitment

In relation to an Investor, the amount of its Commitment which, at any particular time, remains available for drawdown.