A commitment is an investor's legally binding obligation to make contributions of capital to a fund.
A contribution is the satisfaction of that commitment. Contributions are the actual $ amounts transferred from an investor to a fund. Contributions normally happen over time as capital is called by a fund. (Some funds also call all capital at the outset.)
- You subscribe to Reliable Returns, LP today for a commitment amount of $1M.
- The fund accepts and closes your commitment for $1M today.
- At the end of today, you have a legal obligation to contribute $1M to the fund -- but you haven't contributed anything yet.
- Most funds have an initial drawdown. This is a capital call that's due when an investor is accepted into the fund. For the sake of the example, say this initial capital call is for 25% of your commitment.
- You wire $250k next week to satisfy this initial capital call. This $250k is a contribution.
- After your wire is completed next week, you'll still have the same commitment of $1M but will now have made a single contribution of $250k.
- The fund then calls 50% of capital after 6 months and the final 25% of commitments after 1 year. After you've wired the $500k and the final $250k, you'll have contributed the total $1M of your $1M commitment.