Smash the 2025 CAIA Exam – Invest in Success with This Ultimate Practice Test!

Capital commitment in the context of private equity specifically refers to the pledge of an investor to provide a specified amount of capital to a private equity fund over time. This concept is foundational in private equity as it signifies the investor's agreement to fund the investment over the life of the fund, which often spans several years.

When an investor commits capital, they are indicating their intention to supply the necessary funds as the manager identifies investment opportunities, rather than providing the full amount upfront. This structured approach allows funds to manage cash flows and investments more effectively, aligning with the timing of their investment strategies. The capital commitment typically happens in stages, often called drawdowns or capital calls, where the fund requests portions of the pledged capital as needed for investments.

Understanding this concept is crucial for those involved in private equity, as it plays a significant role in fund management and investor relationships. The dynamics of capital commitments impact funding timelines and the overall structure of private equity investments.