The Asset Management Company (AMC) finalizes the Contribution agreement and PPM which will have all the clauses and defined terms which are to be followed throughout the life of the fund for carrying our various operations.
Investors or Limited Partners (LP's) would commit to invest in one or more of the funds floated by the AMC.
By committing towards the fund means that they have promised to pay a defined sum of amount towards that fund, which they might not have paid upfront. The AMC company has the right to ask for that amount in parts by sending out draw down (or capital call) notices to investors till the total committed amount has been drawn down.
From hereon, let us understand these terms with the help of numbers.
Suppose a private equity company XYZ plans to start a fund with a fund size of 100.
5 LP's commit 10, 20, 30, 25, 15 for that fund.
So their capital commitment ratio will be calculated based on the amounts.
In most cases, all drawdowns, investments, expenses and incomes arising are allocated against each LP on the basis of their capital commitment ratio.
To understand that better, Assume that the fund find a very good investment opportunity. It plans to invest 15 into a portfolio company. It decides to ask for 20% of the capital commitment amount (or 20 in amount) from all investors considering the extra expenses that might be incurred by the fund and some extra cash balance for meeting regular expenses like management fees, etc.
In that case the amounts drawn down from each LP will be calculated as follows:
Investors or Limited Partners (LP's) would commit to invest in one or more of the funds floated by the AMC.
By committing towards the fund means that they have promised to pay a defined sum of amount towards that fund, which they might not have paid upfront. The AMC company has the right to ask for that amount in parts by sending out draw down (or capital call) notices to investors till the total committed amount has been drawn down.
For a fund, there will be many Investors (LP's - Limited Partners). In case of a fund with Institutional Investors, there are generally 10-20 investors contributing towards the total fund size while in case of Retail Investors, there have been cases with more than 2000 investors investing in the same fund.
From hereon, let us understand these terms with the help of numbers.
Suppose a private equity company XYZ plans to start a fund with a fund size of 100.
5 LP's commit 10, 20, 30, 25, 15 for that fund.
So their capital commitment ratio will be calculated based on the amounts.
CC
|
CC Ratio
| |
LP 1
|
10
|
10%
|
LP 2
|
20
|
20%
|
LP 3
|
30
|
30%
|
LP 4
|
25
|
25%
|
LP 5
|
15
|
15%
|
100
|
CC
|
CC Ratio
|
Drawdown / Capital Call
|
Drawdown for LP's
| |
LP 1
|
10
|
10%
|
20 % of 100 = 20
|
20% * 10 = 2
|
LP 2
|
20
|
20%
|
20% * 20 = 4
| |
LP 3
|
30
|
30%
|
20% * 30 = 6
| |
LP 4
|
25
|
25%
|
20% * 25 = 5
| |
LP 5
|
15
|
15%
|
20% * 15 = 3
| |
100
|
20
|
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