When an investor makes an investment in a mutual fund, the investor invests the entire amount of the investment on day 1. The mutual fund manager will quickly use this money to increase existing positions in the fund or make new investments. It’s easy for the mutual fund manager to put the money to work by buying publicly-traded securities.
Investments in private equity funds are different. Private equity funds operate on a “called capital” model. By way of background, when an investor (known as a “limited partner” or “LP”) makes a legal commitment to a private equity fund, the LP commits to providing the fund with a certain maximum investment amount, which is known as the “LP commitment.” For example, if an LP agrees to invest a total of $10 million in a private equity fund, that $10 million is the LP commitment. For more background, please see the following posts:
- LP Corner: On Committed Capital, Called Capital and Uncalled Capital
- LP Corner: US Private Equity Fund Structure – The Limited Partnership
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