A commitment is a legally binding obligation by a limited partner to contribute a specified amount of capital to a fund when called by the general partner, typically over the fund's investment period. The commitment is unfunded at the time it is made; capital is transferred only in response to subsequent capital calls, which may occur over several years.
How it works
LP commitments are made at or before fund closing, formalised through the subscription agreement and limited partnership agreement. The subscription agreement specifies the LP's commitment amount, representations and warranties the LP makes regarding eligibility (for regulated fund structures, such as QIAIF well-informed investor status or AIFMD professional investor status), and the LP's bank account details for capital call and distribution purposes.
Total fund commitments across all LPs determine the fund's size. The GP may accept commitments up to a hard cap specified in the LPA; commitments above the hard cap are not accepted. During the fundraising period, the fund typically has multiple closings: a first close that establishes the fund, followed by subsequent closes that admit additional LPs until the final close. LPs who close after the first close pay an equalisation contribution that brings them economically in line with first-close LPs.
From the LP's perspective, a commitment represents a contingent liability on its balance sheet. The uncalled portion is the committed-but-not-yet-transferred amount, which must be available in liquid form at all times during the investment period. Institutional investors (pension funds, endowments, sovereign wealth funds) manage their private markets commitments as part of broader portfolio construction, modelling expected drawdown timing across a portfolio of fund commitments to ensure liquidity is available when needed.
From the fund administrator's perspective, commitments are the foundation of the capital account. Each LP's capital account begins with its commitment as the ceiling on capital contributions, decreases by each drawdown (converting uncalled commitment to contributed capital), and is adjusted for distributions, carried interest allocations, and any recycled capital. The administrator maintains a commitment register that tracks each LP's total commitment, funded amount, unfunded amount, and any adjustments for default or transfer.
Worked example
Harrow Lane Credit Opportunities Fund III holds a final close with 14 LPs and total commitments of EUR 350M. The commitment range is EUR 5M (minimum) to EUR 75M (maximum single LP). LP Gamma commits EUR 40M and signs the subscription agreement at first close.
At first close, LP Gamma's capital account shows: total commitment EUR 40M; contributed capital EUR 0; uncalled commitment EUR 40M. Over the following 18 months, the GP makes three capital calls at 20%, 15%, and 10% of commitment: LP Gamma transfers EUR 8M, EUR 6M, and EUR 4M. After the third call: contributed capital EUR 18M; uncalled commitment EUR 22M.
Two years after first close, two LPs in the fund transfer their interests to new buyers (secondary transfers). The commitment register is updated to reflect the new LP names and account details. LP Gamma's record is unchanged; the fund administrator verifies that all LP transfers have been executed via the appropriate consent and notification process specified in the LPA before updating bank account details.
Frequently asked questions
What happens if an LP cannot meet a capital call on its commitment? Failure to fund a capital call within the specified period triggers the default provisions in the LPA. Consequences typically include interest charges on the overdue amount, loss of voting rights, and (in extreme cases) forced transfer of the LP's interest to other LPs or the GP at a discounted price. The LPA specifies cure periods, usually five to ten business days. Default provisions are negotiated at fund formation; some LPAs include more LP-friendly provisions (such as longer cure periods or lower interest rates) at the request of anchor investors.
Can LP commitments be transferred to a third party? Most LPAs permit transfer of LP interests (including unfunded commitments) subject to GP consent, which is typically not to be unreasonably withheld. Transfers require the new LP to assume all obligations under the LPA and complete the fund's KYC/AML process. Secondary market transactions in LP interests have grown into a significant asset class; specialist secondary buyers purchase existing LP interests (with their associated unfunded commitments) from LPs seeking liquidity before the end of the fund's life.
What is the difference between a commitment and a subscription? A subscription is the process by which an investor applies to join a fund and formalises its commitment through the subscription agreement. Once the GP accepts the subscription, the investor's commitment is binding. In retail fund contexts (ELTIF, QIAIF), "subscription" may also refer to the periodic purchase of units or shares in the fund. In institutional closed-end PE and credit funds, subscription and commitment are effectively synonymous.
What is committed capital vs. deployed capital? Committed capital is the total amount pledged by all LPs; deployed capital (or invested capital) is the amount actually transferred and invested in portfolio assets. Early in a fund's life, deployed capital is significantly lower than committed capital as drawdowns have not yet been made. The ratio of deployed to committed capital is the drawdown rate or called capital percentage.
Related terms
Capital call, Drawdown, Capital account, Subscription agreement, Equalisation, LPA, Side letter
Related pages
How fund administrators manage LP commitments, Swelv for fund administrators