If I commit $250k to a fund, when does the money actually leave my account?

Question

Talking to a manager about a value-add fund and the paperwork keeps saying commitment rather than investment. The minimum commitment is $250,000. My understanding is I sign the subscription agreement, and then they call the money over time as they buy things, so I might only send $60,000 in the first year.

What I don't understand is what I'm obligated to. Somebody described the unfunded part as basically a loan I've promised, and said if you miss a call they can take a chunk of your interest. That sounds severe for something I'd only miss by accident. Also I've seen accredited investor on some funds and qualified purchaser on others and I assumed those were the same thing with different marketing. Are they? And is $250k a normal minimum or is that on the high side?

Rena Guide · Accepted Answer

Your mechanical understanding is right. You sign a subscription agreement for $250,000, and the manager issues capital calls as investments are made, usually with 10 to 15 days notice. The portion not yet called is your unfunded commitment, and it's a binding obligation rather than something you can walk away from. That's why managers care whether you have the liquidity to fund calls over a three to five year investment period.

Default remedies in a limited partnership agreement can be harsh. Common ones include interest charged on the late amount, forfeiture of a percentage of your existing interest, forced sale of your interest to other partners, or losing your right to future distributions until the shortfall is cured. Read the default section before you sign and note what cure period you get, since these clauses vary a lot between funds and their enforceability depends on the governing state law.

On the two investor categories, accredited investor is the general private offering standard, based on income or net worth. Qualified purchaser is a substantially higher investment-holdings standard, and it matters because a fund limited to accredited investors is capped at a much smaller number of them, while a qualified-purchaser-only fund can accept many more. That's a securities law distinction, so confirm your own status with your attorney or accountant rather than self-assessing.

$250,000 is a normal institutional-style minimum. Plenty of funds set $50,000 or $100,000, and the smaller minimum often comes with a slightly higher fee load, since the manager has more investors to administer for the same dollars raised.

nicole_adeyemi · Answer

They're not the same thing, and the gap between them is large. Accredited is the lower bar. Qualified purchaser is a much higher net investment threshold and it exists because of which exemption the fund relies on for its investor count. A fund that only takes qualified purchasers can hold far more investors, which is why the bigger managers use it.

megan_doyle15 · Answer

So the money sitting in my account waiting for a call still has to be liquid for years? I hadn't thought about that at all. Feels like it costs you something to hold cash ready, even if you never notice.

chriswalton8 · Answer

rigging, that's the drag people call the J-curve problem from the LP side. You're paying fees on the committed amount at some funds while only part of it is deployed, so your early reported returns look bad even when the deals are fine. Meridian, ask this manager whether the fee is on committed or invested capital during the investment period. It changes the first two years a lot.

If I commit $250k to a fund, when does the money actually leave my account?

4 replies