Committed Capital

There are many ways to invest your hard-earned money, and if you don’t feel like following the crowd and are searching for something different, you might look into private equity funds. These managed funds pool money from a variety of investors and invest in private, non-publicly traded companies and businesses. Committed capital is what you pay to get into the fund; you can pay it all at once or contribute over a specific period of time. Then you have many different choices as to how you want your capital to be invested: two of them are a specific objective fund and another is a “blind pool.”

First...specific objective fund. A fund manager, Alice, sees a great opportunity to buy a chain of pizza shops. She puts out an announcement that $2 million is needed to close the deal and asks if anyone is interested in investing $100,000. Once everyone has committed to the deal, they make their contributions accordingly. Many investors prefer this type of deal, as they know what they're getting into.

With a blind pool, on the other hand, you don’t know what you're getting into and have to trust the fund manager. Your committed capital could be used for anything that Alice thinks will be a good opportunity. The trade-off is that Alice usually earns a higher internal rate of return for a blind pool, which benefits her investors.

Don’t even think about not paying your share of capital once you commit. You could be subject to fines and penalties, such as having to pay interest on the unpaid amount, and not being invited to the party for future private equity opportunities.