|Methods and techniques|
Committed capital also called Commitments - it is an agreement between venture capital fund and an investor. Investor is being obligated to contribute a particular amount of money to the fund. This agreement is build on forms of contract. All the committed capital can be paid by the investor at one time or it may be spread over some period of time, usually committed capital is divided in parts which should be paid yearly (3-5 years). The committed capital can be used by the venture fund as a way to payoff investment or any fees. It is being made by summoning investor to make contributions when it is needed to be into the fund account. Certain time frames which have been agreed has to be respected within that call for contribution.
Types of committed capital
Committed capital may take various types. One of that type is so called “blind pool” agreement with a private equity fund. This type of investment is brings riskiness to the investor because his contributed money are being invested into purpose that he does not know of. On the other hand, this type gives huge advantage to the managers of venture fund, it brings flexibility, gives lead when opportunity will appear. Private equity market is considered much more riskier than the public equity, but higher risks brings higher returns.
When committed capital is being invested into specified, precise target the fund is obligated to make an call for particular amount of money, that gives investor the knowledge what for his money is invested and he can make a precise contribution. This type is the most commonly chosen one by the investor because it gives them chance to choose the fund that their want to cooperate with, adjust investment into their needs.
Types of penalties when agreement is breached
Failure to fulfill the agreement for committed capital carries several effects. When investor will not fit into with the contribution within the specified time frames the venture fund will probably impose penalties and fees that were included in the contract.
- Fines – Investor has to pay appropriate amount of money to the fund when he does not apply to the provisions of the contract
- Interest charges calculated on the basis of capital that investor ought to contribute. For example, If investor did not pay his contribution on time he looses 5% of his future return on investment
- Actions that may restrict or exclude future participation in the fund. Investor might get banned from taking part in future investments and get blacklisted.
- Investor might be obligated to sellout his part in the investment to other investors (Trémolet S. & Binderre D. 2010)
- Bodie Z., Kane A., Marcus J. A., (2008). Essentials of Investments (Seventh Edition)
- Burgel O., (2000) UK Venture Capital and Private Equity as an Asset Class for Institutional Investors. Research Report
- Kaplan, S. N., & Schoar, A. (2005). Private equity performance: Returns, persistence, and capital flows. The Journal of Finance, 60(4), 1791-1823. eilN
- Marti J., Balboa M., (2001). Determinants of private equity fundraising in Wester Europe. Social Science Research Network Working Paper
- Seitz N., Ellison Mitch., (1999). Capital Budgeting and Long-Term Financing Decisions (Third edition)
- Trémolet S., & Binderre D., (2010) Penalties for non-compliance – What penalties are most effective when the operator is in non-compliance with regulatory rules
Author: Grzegorz Szewczyk