Commitment, Call and Capital Account: How a Fund Draws Money

A commitment is the most an investor has contracted to put into a fund, and signing it moves no money. The fund draws that promise down in pieces. A call is a written notice requiring a stated amount by a stated date, always in proportion to commitments. The capital account is one investor's running record of what it has put in, taken out and still owes.

The arrangement comes before the vocabulary. Every rule that follows falls straight out of it. Cash sitting inside a fund does nothing for the fund and costs the investor the use of it. If a fund took Rs 5,00,00,00,000 on day one and spent the first of it eighteen months later, that money would spend eighteen months earning the fund nothing while the investor could no longer use it for anything at all. So the fund does not take the money. The fund takes a promise instead, and it turns the promise into cash on the exact day a payment has to be made and not one day earlier. Everything that follows is machinery for keeping a promise usable: the notice, the timetable, the proportional rule, the record that keeps score, and the plain fact that the investor never picks the date.

The uncomfortable part is what the arrangement does to the investor. A promise that cannot be withdrawn, cannot be timed and cannot be partly refused is not spare money. An unwithdrawable promise is an obligation that has to be carried, quietly, for as long as the fund lives, and on a statement it appears as one small line that most readers skip.

What did the investor actually promise, and how is that different from investing?

Picture a household that has agreed to fund a cousin's small workshop. Not a lump sum handed over at a ceremony, but an undertaking: up to Rs 6,00,000, paid whenever the workshop actually needs it, over the next five years. Nothing has left the household's account. Yet the household is not free either. The household cannot promise the same Rs 6,00,000 to somebody else, it cannot lock the money into anything it could not get out of quickly, and when the phone rings asking for Rs 90,000 by Friday, Friday is not negotiable. The household has changed its own position without spending a rupee.

A capital commitmentThe maximum amount an investor has contracted to put into a fund, payable in pieces when the fund asks for them. is that undertaking written down and made enforceable. A capital commitment fixes a maximum, it fixes nothing else, and on the day it is signed the investor's bank balance is exactly what it was the day before. A bank balance that has not moved is what separates a commitment from an investment, and readers who blur the two go on to misread every statement the fund ever sends them.

In Nilgiri Growth Partners Fund II, invented, twelve investors committed Rs 4,90,00,00,000 between them and the manager committed a further Rs 10,00,00,000 of its own, taking total commitments to Rs 5,00,00,00,000. Not one rupee of that Rs 5,00,00,00,000 was inside the fund on the day the commitments were signed. Investor 1, a domestic life insurance company, committed Rs 1,00,00,00,000, or 20.0 per cent of the total, and every figure from here on is investor 1's.

Why does a fund ask for money in pieces instead of taking it all at the start?

Because both sides are better off with a promise than with a pile of cash, and for different reasons. Take the fund first. A fund that holds Rs 5,00,00,00,000 in a bank account has to explain what that money is doing while it waits, and the honest answer is nothing. Worse, the clock on the fund's own performance starts when money goes out, so idle cash quietly drags on every measure the investors will eventually read. Calling the money on the morning it is needed removes the problem by removing the idle cash.

Now the investor. An institution that has committed Rs 1,00,00,00,000 has not handed anything over, so it goes on using that money right up to the day each notice falls due. The cost it pays for that convenience is precise and it is not money: it is the loss of control over its own timetable. The institution must keep itself able to pay, in cash, on a date somebody else picks, for as long as the fund lives.

The whole arrangement is a trade of certainty for efficiency, and the investor is the side that gives up the certainty. That is not a complaint and it is not a flaw in the design. The trade is simply what the two parties agreed, and every mechanism that follows exists to make an uncertain timetable workable rather than chaotic: written notices, fixed periods, a proportional rule that removes discretion, and a record that both sides can check.

What actually arrives when the fund wants money?

Capital Call: The Notice, the Notice Period and the Payment Date

A document arrives, not a conversation. A capital callA written notice from a fund requiring its investors to pay in a stated amount by a stated date. is a written notice sent to every investor at once, signed on behalf of the manager, and in Nilgiri Growth Partners Fund II, invented, the officer who signs it is Farida Contractor, its chief operating officer. The same event seen from the fund's side is called a drawdownThe fund's own word for a capital call, describing the money actually drawn rather than the notice that asked for it., and the two words describe one transaction from two ends of it.

Three things are always on the notice and one thing never is. The notice states the amount, meaning the total the fund is drawing and this investor's own share of it. The notice states the purpose, meaning what the money buys: a named acquisition, the management fee, fund expenses, or something the fund has already contracted to pay. And it states the date, being the day the money must be in the fund's account. A capital call is an instruction to pay and makes no claim of any kind about an outcome, so a notice never states what the investor will get back.

Between the notice landing and the date falling due sits the notice periodThe gap a fund's documents set between a call notice going out and the money falling due.. Its length is fixed in the fund's own documents, agreed before anybody signed, and it is a term of one contract rather than a rule of nature. The shape matters more than the length: the gap is a period, it is known in advance, and nothing inside it is up for discussion.

Why does everybody pay the same percentage on the same day?

Because the rule is proportional, and a proportional rule is what stops the manager choosing between investors. Every call in Nilgiri Growth Partners Fund II, invented, goes to all thirteen parties at once, being the twelve investors and the manager on its own commitment, and each of them is asked for the same fraction of the call that its commitment is of the fund. Investor 1 committed Rs 1,00,00,00,000 out of Rs 5,00,00,00,000, so it is asked for 20.0 per cent of every call, every time, without anybody deciding anything. On a call of Rs 50,00,00,000 its share is Rs 10,00,00,000, and that is the only sum involved.

The proportional rule is not a courtesy to investors, it is the removal of a discretion, and removing a discretion is what makes a rule enforceable. If the manager could choose who to call and when, an investor would have to trust that choice quarter after quarter for a decade. Nobody has to trust an arithmetic identity. The full split of one call across all thirteen parties, worked line by line, is covered separately.

One thing can move a particular investor out of the ordinary proportion, and it is worth naming so that nobody assumes the rule is absolute. A side letter, being a separate agreement between the fund and one investor, can carry an excuse right that lets that investor sit out an investment its own mandate forbids. In this fund investor 3, an overseas sovereign-linked investor, has exactly that. When an excuse is exercised the remaining parties carry the call between them in their own proportions. Side letters and what they can and cannot reach are covered separately, and none of the six in this fund moves investor 1's economics at all.

What shape do the calls make across a whole fund's life?

How Fund Commitments and Capital Calls Work

Not one big draw, and not the even trickle most readers picture. The shape is front-loaded and then it thins to a dribble that never quite stops. Nilgiri Growth Partners Fund II, invented, made seventeen calls from its final close to the end of Year 9 Quarter 2, totalling Rs 4,80,00,00,000, being 96.0 per cent of the Rs 5,00,00,00,000 promised to it.

Thirteen of those seventeen fell inside the fund's five-year investment period and account for Rs 4,55,50,00,000, or 94.9 per cent of everything the fund has ever drawn. The largest single call was Rs 60,00,00,000 in Year 2 Quarter 2. Then the period ended, and the remaining four calls, spread across three and a half years, were Rs 8,80,00,000, Rs 7,20,00,000, Rs 6,30,00,000 and Rs 2,20,00,000. The last four add to Rs 24,50,00,000 and every rupee of them is management fee and fund expenses. Not one of the last four calls bought anything at all.

Where did the Rs 4,80,00,00,000 actually go? The drawn total splits into three pieces that reconcile exactly: Rs 4,00,00,00,000 of acquisition cost across nine holdings, Rs 70,20,00,000 of management fee, and Rs 9,80,00,000 of fund expenses. Adding those three gives Rs 4,80,00,00,000 to the rupee, and the same addition is the check worth running on any fund that shows a drawn total. The split also carries a lesson a reader can use immediately: Rs 80,00,00,000 of what the investors paid in never bought a company, it paid for the fund to exist.

What can still be called once the fund has stopped buying?

Four things, and the list is closed. When an investment period ends, the door that shuts is a door on one particular reason for asking, not on asking at all. The natural assumption is that the end of the buying phase is the end of the demands, and that assumption trips up almost every reader who meets the distinction for the first time. The demands do not stop, and investor 1 of Nilgiri Growth Partners Fund II, invented, has paid four calls since that period ended.

The four purposes this fund's own documents permit after Year 5 are these. First, a follow-on investmentMore money put into a company the fund already holds, rather than into a new one. into a holding the fund already has, with the total of such follow-ons capped by the documents at 15.0 per cent of commitments. Second, the management fee. Third, fund expenses, meaning what it costs to run the vehicle: the administrator, the independent valuation agent, the auditor, legal, custody. Fourth, an obligation the fund had already committed to under an agreement signed before the period closed. A company the fund has never held is not on that list, and that single exclusion is the whole of what the end of an investment period does.

There is a fifth thing worth knowing about, though this fund has not used it. Some funds' documents allow a distribution already paid out to be called back and drawn again, and the name for that right is a recallable distributionA distribution the fund's documents allow it to demand back later and draw down a second time.. Where that right exists, money an investor has already received is not necessarily finished with. Whether it exists at all is a term of one particular contract, and reading it is the only way to know.

Whose unfunded commitment is Rs 20,00,00,000, and whose is Rs 4,00,00,000?

Both figures are correct, they describe the same fund on the same day, and they are five times apart. Two unfunded commitments five times apart is the single confusion most likely to cost a reader real money, and the cure is to name the level of every number stated.

At the end of Year 9 Quarter 2, Nilgiri Growth Partners Fund II, invented, had drawn Rs 4,80,00,00,000 of the Rs 5,00,00,00,000 promised to it. Subtract and the fund's own unfunded commitment is Rs 20,00,00,000. Rs 20,00,00,000 is a fund-level figure. The thirteen parties, all of them together, have still to pay it in. No single one of them owes it.

Investor 1 committed Rs 1,00,00,00,000 and has paid in Rs 96,00,00,000. Subtracting one from the other leaves its own unfunded commitment at Rs 4,00,00,000. Rs 4,00,00,000 is an investor-level figure. The insurance company has still to pay it, and nobody else does. The same number arrives the other way: investor 1 holds 20.0 per cent of the fund, and 20.0 per cent of the fund-level Rs 20,00,00,000 is Rs 4,00,00,000. Both routes land on the same figure, exactly as proportional drawing requires. The fund-level figure and the investor-level figure are five times apart and neither one is a mistake, so a reader who quotes an unfunded commitment without naming the level has said almost nothing.

Now the part that makes this confusion so durable, and it is worth reading twice. Rs 4,80,00,00,000 over Rs 5,00,00,00,000 is 96.0 per cent. Rs 96,00,00,000 over Rs 1,00,00,00,000 is also 96.0 per cent. The two percentages are identical, and they are identical for a reason rather than by accident: the drawing is strictly proportional, so every party is at the same fraction of its own promise at every moment. Equal percentages feel like equal positions. The percentage is shared and the rupees are not, and the whole of the trap sits in that one difference.

How do the three numbers stay tied to each other?

By a subtraction that has to work every single time, and it is the only check on the whole statement a reader can run without being told anything else. Commitment less contributed equals unfunded. For investor 1 of Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2, that is Rs 1,00,00,00,000 less Rs 96,00,00,000, giving Rs 4,00,00,000. Three numbers, one relationship, no judgement anywhere in it.

The three numbers move together and only in one direction, and that is what makes the subtraction worth practising. A call raises contributed and lowers unfunded by the same rupee on the same day. Nothing else on the statement can touch either of them. A distribution does not reduce a commitment. A holding being written down does not reduce a commitment. A gain does not reduce a commitment. The commitment line only ever falls when money is actually paid in, so it is the one line on the whole statement that cannot be argued with.

There is one exception, and it exists in this fund's documents even though it has not been used. Where the documents allow a distribution to be recalled, a repayment can put unfunded commitment back up again. A recall is the only way the subtraction runs backwards, and it runs backwards by contract rather than by accident.

What does the running record for one investor actually hold?

Capital Account: The Five Lines and What Each One Is

A chit arrangement in a neighbourhood shows the shape, the kind run for years among people who know each other. Somebody keeps a book. Against each name there are only a few columns: what that person undertook to put in, what has actually been paid so far, what has come back, and what is still outstanding against the name. Nobody in that book has an opinion recorded next to them. The book holds positions, not verdicts, and anybody can check their own row in about a minute.

A capital accountThe running record a fund keeps for one investor, holding what it has contributed, what it has received back and what it still owes. is that book, kept quarterly, for one investor in one fund. The administrator keeps it, and in Nilgiri Growth Partners Fund II the administrator is Kolar Fund Services Private Limited, invented. Investor 1's account at the end of Year 9 Quarter 2 carries five lines, and the useful way to read them is not one by one but by what kind of number each one is.

The bottom row is the number everybody quotes and almost nobody checks, so it is worth working through. Rs 87,60,00,000 of cash received plus Rs 56,40,00,000 of estimated value is Rs 1,44,00,00,000 of total value. Dividing that by the Rs 96,00,00,000 investor 1 has actually paid in gives 1.50 times exactly. The 1.50 times comes out at the fund's own multiple because the drawing is proportional and none of this fund's six side letters moves investor 1's economics, so investor 1 experiences the fund and nothing but the fund.

The 1.50 times belongs to investor 1 of Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2, and it is 1.50 times what was paid in rather than 1.50 times anything else. Against the Rs 1,00,00,00,000 investor 1 committed, the same Rs 1,44,00,00,000 is 1.44 times. Both statements are true on the same day about the same account. The difference is entirely the denominator, and a multiple quoted with no denominator named has not said which of them it means.

The residual value line deserves one more sentence before the next section takes it apart. Investor 1's Rs 56,40,00,000 is its 20.0 per cent share of the Rs 2,82,00,00,000 the fund carries for five holdings it still has. Nothing inside that figure has been sold to anybody.

Which line on that statement was never sold to anybody?

An everyday version makes the shape obvious. A jeweller keeps a ledger: Rs 3,00,000 taken across the counter this year, plus Rs 2,00,000 of stock still in the case, so a total of Rs 5,00,000. The first figure is money customers paid. The second is what the jeweller thinks the stock is worth. The stock will be worth exactly what the next customer pays, and nobody knows that figure yet. Reporting Rs 5,00,000 as this year's result is not a lie. The total is a fact and an estimate reported as though they were the same kind of thing.

What happens if an investor does not fund a call?

Whatever the documents signed at the start say happens, and that is the whole point of signing them. A defaulting investorAn investor that has not paid a capital call by the date the notice set. is one that has not paid by the due date, and by the time that happens the fund is usually already contractually committed to somebody else for the money. So the remedies are not invented in the moment. The remedies are written into the contribution agreement and the fund's own documents before anybody has defaulted, and they sit there unused for years.

A partnership agreement or a contribution agreement can carry any of five clauses. Interest running on the unpaid amount from the due date. A suspension of the defaulting investor's right to receive distributions while it stays in default. A forced transfer or a compulsory sale of the interest to another investor or a third party. A forfeiture of some portion of the account already built up. A right for the manager to draw the shortfall from the other investors instead, within their own unfunded commitments. Which of these exist, and in what order, is a matter of one particular contract rather than a rule that applies anywhere.

The reason these clauses are written so bluntly is worth sitting with. A fund that cannot complete a payment it has contracted for has a problem with a counterparty who has nothing to do with the investor that failed, so a default is never one investor's private problem. The shortfall has to come from somewhere on the day it is due. The remedies are automatic rather than negotiated for that reason, and nobody is having a conversation about them in the middle of a shortfall. In Nilgiri Growth Partners Fund II, invented, all seventeen calls were met in full and none of this machinery has ever been used.

How does somebody who works with these documents actually use them?

Three different people read the same three ideas for three different reasons, and watching them do it is the fastest way to see why the vocabulary is worth learning properly.

The first is whoever runs cash inside an institution that has made commitments. The person who runs that cash does not read the capital account for its multiple but reads one line, the unfunded commitment, across every fund the institution holds at once, adding the unfunded balances into a single figure of money that can be demanded on dates nobody has told them yet. Then they hold the institution in a position where it can pay that figure. Investor 1 of Nilgiri Growth Partners Fund II, invented, carries Rs 4,00,00,000 of unfunded commitment into six remaining quarters of a ten-year term. On its own that is small. Sitting alongside the unfunded balances of every other fund the insurance company holds, it is one row in a schedule somebody maintains for a living.

The second is an analyst checking a fund's reported figures against an investor's own record. The subtraction on the capital account needs no other document, so it is the first thing they run: commitment less contributed must equal unfunded. Then the reconciliation on the drawn total: acquisition cost plus management fee plus fund expenses must equal everything ever called. In this fund that is Rs 4,00,00,00,000 plus Rs 70,20,00,000 plus Rs 9,80,00,000, being Rs 4,80,00,00,000 exactly. Two subtractions and one addition will tell an analyst whether a fund's own numbers agree with each other, and that is a different and more basic question than whether the fund did well.

The third is a credit officer at a lender looking at that same insurance company as a borrower. To them an unfunded commitment is a contingent obligation: money the borrower has contracted to pay, not yet paid, not on the face of the balance sheet as a liability, and not cancellable. A contingent obligation is not a debt and it is not nothing. Spare capacity is the natural reading of a number that has not been spent, and spare capacity is exactly what an unfunded commitment is not.