Capital Commitment

Capital Commitment
See also
Private equity investments Anonymous Trading Primary market Debt capacity Managed forex accounts Trade house Corporate agent Classification of financial markets Property portfolio

Capital Commitment is a number of funds, which investors provide in case of investment. The investment in venture capital and the buyout is restricted to the institutional investors and wealthy private individuals or family offices, which become limited partners with their investment, in case of the structure of the fund is characterized as a limited partnership. During the fundraising, they provide the committed of funds. The money, which is committed, is called committed capital. Capital commitment is particularly important to the functioning of markets where buyers and sellers arrive sporadically and search costs are relatively high.

Pros and cons of using capital commitment

There is a huge variety of the pros and cons of using a capital commitment. It is necessary to consider them before the decision of capital commitment will be taken.

Advantages

Disadvantages

increasing liquidity and financial efficiency, commitment mechanism allows the banks to commit to a higher future price level through current currency depreciation, provides support to escape from a liquidity trap, commitment strategy helps gain knowledge capital, there is no need to keep up with costs of servicing bank loans or debt finance, some venture capitalists can bring valuable skills, contacts, and experience to a business, investors can help in making key business decisions, it helps to develop the enterprise, increases the satisfaction and self-fulfillment of managers as new projects are created, thanks for capital commitment,

there is a huge risk connected with an uncertain investor, because of a small mistake it is easy to lose liquidity, raising equity finance is demanding, costly and time-consuming, potential investors need to have meticulous information about the company's financial history, past results, and forecasts. Preparing this information takes lots of time, there are problems with legal issues and regulations, investors make some decisions, and the company's owners cannot change them,

Examples of Capital Commitment

• Investment Funds: Investment funds are a type of capital commitment in which investors commit capital to a fund that invests in a variety of assets. The fund provides investors with access to a broader range of investments than they would have access to on their own.
• Real Estate: Real estate capital commitment is a type of investment in which investors commit a sum of money to a real estate project. The investment is used to finance the acquisition and development of properties.
• Private Equity: Private equity capital commitment is a type of investment in which investors commit capital to a private equity fund in exchange for a share of the profits generated by the fund’s investments.
• Venture Capital: Venture capital capital commitment is a type of investment in which investors commit capital to a venture capital fund in exchange for a share of the profits generated by the fund’s investments.

Advantages of Capital Commitment

Capital commitment has several advantages. It provides investors the flexibility to make decisions on investments at their discretion, while ensuring that the funds are available when needed. Additionally, it allows investors to diversify their investments across different asset classes and strategies. Furthermore, it enables investors to benefit from diversification of risk, as well as being able to reduce the risk of loss associated with any single investment. Lastly, capital commitment allows investors to take advantage of market opportunities that may arise and provide them with potential returns. *Flexibility to make decisions at their discretion *Ability to diversify investments *Reduces risk of loss associated with any single investment *Enables investors to benefit from diversification of risk *Allows investors to take advantage of market opportunities.

Limitations of Capital Commitment

• The capital commitment of investors may be limited to the capital that is available to them. This means that the amount of capital that can be committed may be significantly lower than the amount of capital that could be raised if all potential investors were able to commit their funds.
• Capital commitment is also limited by the investment objectives and risk tolerance of the investors. Investors may be unwilling to commit funds to certain types of investments due to their higher risk profiles.
• In some cases, the capital commitment of investors may be limited due to the legal or regulatory environment in which they operate. For example, some investors may be prohibited from investing in certain types of investments due to the laws, regulations, or policies that apply in their jurisdiction.
• Capital commitment is also limited by the liquidity of the investment. If the investment is not liquid, investors may be reluctant to commit funds as they may not be able to access them in the event of an unforeseen need for liquidity.
• Finally, capital commitment may be limited by the reputation or track record of the fund manager. Investors may be unwilling to commit funds to a fund managed by an inexperienced or untested manager.

Other approaches related to Capital Commitment

• Leveraged Buyouts: Leveraged buyouts (LBOs) are a type of transaction where a company is acquired using a combination of equity and debt. The debt is typically secured by the target company's assets and this structure allows the acquirer to make a large purchase without having to put up a significant amount of cash. This makes the transaction more attractive to potential buyers as they can use existing capital to finance the purchase.
• Venture Capital Financing: Venture capital financing is an investment by venture capitalists in a start-up or early-stage business. Venture capitalists provide funding to businesses that have potential for high growth and returns but are too risky for traditional lenders. They usually take an active role in the company and provide guidance, advice, and connections to help the business grow.
• Mergers and Acquisitions: Mergers and acquisitions (M&A) is the process of combining two or more companies into one entity. This can be done through the purchase of one company by another, the creation of an entirely new company, or a combination of both. M&A is a complex process and requires careful consideration of the financial, legal, and strategic implications of the deal.

In conclusion, Capital Commitment is an important part of investment and finance, which involves providing funds to potential investments. Other approaches related to Capital Commitment include Leveraged Buyouts, Venture Capital Financing, and Mergers and Acquisitions. All of these approaches involve providing funds to investments but differ in terms of structure and the type of investment being made.

References

• Bessembinder H., Jacobsen S., Maxwell W., Venkataraman K. (2018), Capital Commitment and Illiquidity in Corporate Bonds, "The Journal of Finance. The Journal of the American Finance Association", vol. 73.
• Farhi E., Sleet Ch., Werning I., Yeltekin S. (2012), Non-linear Capital Taxation Without Commitment, "The Review of Economic Studies Advance Access", vol. 20.
• Gregoriou G. N. (2008), Encyclopedia of Alternative Investments, CRC Press, New York.
• Jeanne O., Svensson L. E. O. (2004), Credible Commitment to Optimal Escape from a Liquidity Trap: The Role of the Balance Sheet of an Independent Central Bank, International Monetary Fund.
• Kent Baker H., Filbeck G., Kiymaz H. (2015), Private Equity: Opportunities and Risks, Oxford University Press, New York.
• Lu Q. (2007), Long-Term Commitment, Trust and the Rise of Foreign Banking in China, Chandos Publishing, Oxford.
• Marin M. (2017), Connected by Commitment: Oppression and Our Responsibility to Undermine It, Oxford University Press, New York.
• Mayer C. (2013), Firm Commitment: Why the corporation is failing us and how to restore trust in it, Oxford University Press, United Kingdom.
• McMurray A.J., Pirola-Merlo A., Sarros J.C., Islam M.M. (2010), Leadership, climate, psychological capital, commitment, and wellbeing in a non-profit organization, "Leadership & Organization Development Journal", vol. 436.

Footnotes

Author: Milena Kurczek