Why the undrawn commitment in the quarterly report overstates what a fund can still invest, and the five deductions that turn it into a budget.
A fund's dry powder is not its unfunded commitment. Start from unfunded, which includes recallable distributions, then take off the fees and expenses still to be called, the follow-on reserves for the existing portfolio and any investments already made on the subscription line. On an illustrative $500m buyout fund with $221.0m unfunded, that leaves $102.35m for new deals: 46.3 per cent of the headline, and two platform investments rather than the five the headline suggests.
Worked in full in The Private Equity Fund Controller Playbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The difference matters most at the point where it is least visible: in year three of a five-year investment period, when the deal team is deciding how many more platforms to pursue and the quarterly report still shows a large undrawn number. The controller is the person who can turn that number into a budget.
A buyout fund with $500m of commitments is three years into a five-year investment period. It charges 2 per cent on commitments during the investment period and 1.5 per cent on net invested capital after it. Every figure is illustrative.
| Item | $m |
|---|---|
| Commitments | 500.0 |
| Called for investments | 260.0 |
| Called for management fees (3 years at $10.0m) | 30.0 |
| Called for fund expenses | 4.0 |
| Total called | 294.0 |
| Recallable distributions (capital returned from a partial realisation) | 15.0 |
| Unfunded commitment, as reported | 221.0 |
| Investments funded on the subscription line, not yet called | 25.0 |
The portfolio has cost $285.0m in total: the $260.0m called plus the $25.0m still sitting on the facility. The investment committee wants to hold follow-on reserves of 15 per cent of invested cost, and expects net invested capital of about $300.0m on average across the five years after the investment period.
Unfunded = commitments − total called (investments, fees and expenses) + recallable distributions
Here: 500.0 − 294.0 + 15.0 = $221.0m.
The recallable $15.0m belongs on the unfunded line until the recall right lapses, because the fund can still ask for it. Leaving it out understates capacity at $206.0m. The mechanics of a recall, and why a fund can draw more in total than the commitment, are worked in can a fund call more than my commitment.
Every one of the following will be called from the same unfunded pool, whether or not another deal is done.
| Line | Basis | $m |
|---|---|---|
| Unfunded commitment | Step 1 | 221.0 |
| Fees for the rest of the investment period | 2 years at $10.0m | −20.0 |
| Fees after the investment period | 5 years at 1.5% of $300.0m | −22.5 |
| Fund expenses to the end of the term | 7 years at $1.2m | −8.4 |
| Follow-on reserves | 15% of $285.0m invested | −42.75 |
| Subscription line to be repaid by a call | drawn balance | −25.0 |
| Investable dry powder | 102.35 |
With commitments in B2, total called in B3, recallable in B4, the five deductions in B6:B10:
=B2-B3+B4-SUM(B6:B10)
The deductions total $118.65m, more than half the headline. Two of them are routinely missed. The $25.0m on the subscription line has already been spent on a portfolio company; the call that repays it will reduce unfunded without buying anything new. And the post-investment-period fee, $4.5m a year, is a call on commitments in many agreements unless the fund pays it from proceeds.
The fund has $102.35m of capital it can actually put into new platforms: 46.3 per cent of the unfunded figure and 20.5 per cent of commitments. At an average equity cheque of $45.0m, that is 2.27 platforms. The unfunded number, divided by the same cheque, suggests 4.91. A deal team planning on the headline would sign a third platform it cannot fund without cutting the reserves of the existing portfolio.
Dry powder is a budget, not a balance. Unfunded is a legal fact taken from the register. Dry powder is a forecast built on assumptions about fees, expenses and reserves, and it should be presented with those assumptions next to it.
The reserve rate is the largest single judgement, and the one the investment team will push on. What a reserve buys once it is spent on a rescue round is a separate question, worked in what a follow-on reserve is actually worth; here it is only a deduction from capacity.
| Reserve rate | Reserves | Dry powder | Platforms at $45.0m |
|---|---|---|---|
| 10% | 28.5 | 116.6 | 2.59 |
| 15% | 42.75 | 102.35 | 2.27 |
| 20% | 57.0 | 88.1 | 1.96 |
| 25% | 71.25 | 73.85 | 1.64 |
Each five points of reserve costs $14.25m of new-deal capacity, about a third of a platform. The fee assumption works the other way: if the agreement lets the general partner pay the post-investment-period fee out of distributions, half of it paid that way lifts dry powder to $113.6m and all of it to $124.85m. Read the fee clause before the forecast, not after; the base on which that later fee is charged is worked in how the management fee is calculated after the investment period.
Compute dry powder as unfunded plus recallable, less future fees and expenses, less follow-on reserves, less anything already invested on the facility. Then divide by the average cheque, because the number of platforms left is the figure the investment committee actually needs. The investor register, the unfunded tracking and the recallable treatment are built out in the free workbook for this case.
No. Unfunded commitment is what investors can still be asked to contribute. Dry powder is the part of it free for new investments once future fees, fund expenses, follow-on reserves and any subscription line balance are set aside. In the worked case $221.0m of unfunded commitment leaves $102.35m of dry powder, less than half.
Yes, while the recall right is live. A recallable distribution increases the unfunded commitment because the fund can call it again. In the worked case $15.0m of recallable capital lifts unfunded from $206.0m to $221.0m. Once the recall period lapses it should come off the unfunded line and out of dry powder.
It is a judgement set by the investment committee, often expressed as a share of invested cost. In the worked case each five points of reserve on $285.0m of invested cost removes $14.25m of capacity: dry powder is $116.6m at 10 per cent and $73.85m at 25 per cent. The controller should show the rate next to the result.
Unfunded commitments and recallable distributions are covered in chapter 5 of The Private Equity Fund Controller Playbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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