Fund accounting

Unfunded commitment

Also called uncalled capital, undrawn commitment, uncalled commitment, dry powder.

Definition

Unfunded commitment is the portion of a limited partner's capital commitment that the fund has not yet called, calculated as total commitment less contributions to date plus any distributions the LPA makes recallable, and represents the LP's remaining obligation to fund capital calls.

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Example

An LP commits $8M to a fund. Over three years the fund calls $5.2M. It then distributes $300,000 to the LP flagged as recallable. Unfunded commitment is $8M less $5.2M plus $300,000, or $3.1M. That is the most the fund can still ask the LP for. The LP's total exposure to the fund for planning purposes is their capital account, say $5.9M after gains, plus the $3.1M unfunded, or $9M.

Confused with

Capital account. The capital account is what has happened: money in, gains and losses allocated, money out. Unfunded commitment is what has not happened yet.

Follow-on reserve. A reserve is the GP's plan for how it intends to use the fund's unfunded commitments. Unfunded commitment is the LP's legal obligation whether or not there is a plan for it.

In practice

Unfunded commitment is the number a subscription line lender advances against, the number an LP uses to manage its own liquidity, and the number a default is measured against. It should agree between the fund's records, the capital account statement and the LP's own books every quarter. The usual causes of a mismatch are recallable distributions, equalisation at a later closing and fees called outside the commitment.

Related terms

Capital callA capital call, also called a drawdown, is a notice from the general partner requiring each limited partner to wire a portion of their committed capital to the fund by a due date, usually ten business days, to fund investments, fees or expenses.
Recallable distributionsRecallable distributions are amounts distributed to limited partners that the limited partnership agreement allows the general partner to call again, usually proceeds returned within a set period of the investment or capital returned before it was invested, so the distribution restores unfunded commitment instead of permanently reducing it.
Capital accountA capital account is the running balance of a single partner's economic interest in a fund: contributions in, allocations of income, gains and losses, less distributions out.
NAV (net asset value)NAV, net asset value, is the value of a fund's assets, with investments carried at fair value, less its liabilities at a reporting date, and equals the total of all partners' capital accounts.