Let’s say a fund has $500M committed capital and then it starts to “draw”… is the committed capital actually in the hands of the manager from day 1, or do they collect the money from the investors as they draw it?
They collect money as they draw it, and they usually don’t draw it all at once.
What happens if you commit $5M and then 12 months down the road, you spent the money (dont have it anymore) when they start drawing?
They send Guido over to . . . um . . . help you find the money.
Miscommittment on committed capital normally does not happen for big PE funds with known investor base.
In any case fund memorandum specifies the penalties that would be charged in case any investor do not disburse against the capital call.
In some cases it would become the responsibility of an investor that if he cannot disburse due to financial problems and wants to exit from the committment altogether then he would find other investor based on the investor eligibility criteria of the fund to replace him.
Lastly fund memorandum may have a provision to call the entire committed capital at once and put it in an interest bearing escrow account. The interest may be paid to the investors or reinvested.