Overcommitment
Overcommitment is committing to more illiquid fund capital than currently available cash, assuming future distributions and staggered capital calls will cover obligations.
Allocator relevance: A common practice, but a major liquidity risk if distributions slow or calls accelerate—especially during downturns.
Expanded Definition
Because private funds call capital over time, allocators often commit more than they have in cash. This can improve capital efficiency, but it creates mismatch risk if assumptions fail. Overcommitment becomes dangerous when multiple funds call capital simultaneously and public markets are down, reducing the ability to sell liquid assets without losses.
Allocators manage this through pacing models, liquidity budgets, and stress testing.
How It Works in Practice
Teams forecast capital calls and distributions across vintages and strategies, then set an overcommitment ratio within risk limits. They update models frequently as market conditions change.
Decision Authority and Governance
Governance sets overcommitment limits, monitoring cadence, and action triggers. Weak governance leads to “model optimism” and forced secondary sales under stress.
Common Misconceptions
- Overcommitment is always safe because calls are slow.
- Distribution forecasts are reliable in stress.
- Overcommitment only matters for endowments and pensions.
Key Takeaways
- Overcommitment is leverage-like liquidity risk.
- Stress scenarios determine survival.
- Governance + frequent model updates are essential.