Capital Call

A capital call is a fund's request to its investors to actually pay in committed capital. Investors usually commit a total amount to a fund, which is then drawn down gradually as needed. The capital call triggers the actual payment for an upcoming investment.

Calls are made not only for investments themselves but also for management fees, transaction costs and follow-on funding of existing portfolio companies. The notice is issued in writing stating amount, purpose and payment deadline, which fund documentation typically sets at around ten business days. Because the commitment is legally binding, the agreements provide harsh consequences for default, including penalty interest, forfeiture of profit entitlements and forced transfer of the interest to other investors. A defaulting investor endangers the fund directly, since the fund has given its word to the seller of a target company.

Drawing capital on demand rather than up front has a clear rationale: uncalled capital keeps working for the investor, and fund returns are measured as an internal rate of return on actual cash flows, so any unnecessarily early payment worsens that figure. Short-term subscription facilities at fund level are therefore common, pre-funding investments and bundling calls. This can increase reported internal rate of return, while interest and fees may reduce the multiple on invested capital, which is why investors look at both metrics side by side. For the investor this creates a management task of its own, since sufficient liquidity must be held available for calls made on short notice at all times.

A provision is also common allowing amounts returned from quickly realised investments or from the repayment of bridge financings to be recalled within the investment period. Total drawdowns can thereby slightly exceed the commitment. The sequence of calls also matters to the investor, since fees arise regularly and evenly while investment calls arrive irregularly. It has proven useful to model expected calls across the early years and to include a safety margin.