January 26, 2022

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Meaning of Commitment Period for Private Equity Fund and Explanations

Meaning of Commitment Period for Private Equity Fund and Explanations
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Venture capital firm serves as a financial intermediary between a private equity firm (deficit agent) and investors (surplus agent). They provide funds that cannot be provided by conventional banking systems. They dive into the waters of high level risk private companies and pull the entity out into a large well recognized business. Google, Facebook, Amazon and locally Jumia are among companies that have been sip with this type of investment. Here, let’s talk about the “commitment period” of this source of capital.

Definition — What is Commitment Period?

1. It is the period of time usually within 3 to 5 years in which investors can invest in a new private equity fund or to provide additional capital to a present fund in a portfolio company.
2. You can define it as the period of time mostly three to five years a venture capital firm is permitted to make capital calls from investors who have subscribed to a private equity fund of a portfolio company.

Key Explanations

Period if time. Unlike investment period, committed period is a longer period. It is a period of three years and five years or more. Within this period, the VC firm can call for investment multiple times.

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Private equity fund. It is the fund required to invest in a private equity company. It could be a single fund invested in several companies. For example, MEST, a VC firm in Ghana, has a single fund for investment in early stage startups. Or a multiple of private equity funds provided to mutually exclusive (distinctive) companies.

Capital call. Capital call was coined from investing in real estate. It means to request for the fund promised by investors who have subscribed to a fund. In a previous article I wrote, VC can make several capital calls.

Portfolio companies. They are private equity companies. Another name for this is startups. Usually, a venture capital firm has investment or plans to invest in those companies in the near future. Portfolio companies means that VC firm’s has investment in them.

Conclusion

Commitment period can last for at least five years. During the period, investors can pay a portion of the amount they have subscribed to pay for a private equity fund hosted by a VC firm on behalf of a single portfolio company or a multiple of it. But it is the duty of the venture capital firm to request for the fund. VCs can do this through capital calls. It also set time limits for such calls.

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