download a capital call template
Dry powder, aka the uncalled capital committed by investors at the outset of their joining a private equity fund, continues to hit new records. So how do these levels come down? Private equity managers must “call” this capital once they’re ready to put it to use.
In these situations, private equity fund accounting teams must kick off a capital call. Let’s get into the specifics.
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What is a capital call?
Private equity capital call definition
A capital call is the act of a private equity manager requesting a certain amount of committed capital from investors once the manager needs it, such as when the fund has found a deal it would like to pursue. Investors are alerted via a private equity report called a capital call notice and have a deadline to transfer this capital to the private equity fund, at which point it becomes “paid-in capital”.
When investors, or limited partners, sign onto a fund and commit to a certain level of investment, their limited partner agreement (or LPA) dictates how much of that investment capital they must contribute up front. The original investment amount less the capital provided up front is their uncalled capital, and represents the amount of money that can be called at any time over the life of the fund, with specific stipulations around volume and frequency laid out in the LPA.
INFOGRAPHIC: Complete a Capital Call in 10 Minutes
What happens if private equity investors don’t meet a capital call?
Penalties for investors who have defaulted and are unable to pay a capital call by the deadline would differ depending on the fund, with specific actions laid out in the LPA. Common next steps could include:
- Accruing interest on the missing capital
- Initiating legal proceedings
- Offering up purchase of the defaulted investor’s share of the fund pro rata to other fund investors
- Selling the defaulted investor’s share of the fund on the secondary market
GPs’ challenges in managing capital calls
Without the right engine powering a private equity firm’s end-to-end operations, managing a capital call requires plenty of time, attention, and resources.
Depending on the size of a private equity fund, there may be anywhere from dozens to hundreds of investors, each with varying share sizes in the fund – thus each of those investors needs its own capital call investor report generated. Unless the fund has the right tools to automatically generate these notices, the process is likely to be lengthy and error prone.
Once the capital call notices are sent out, fund teams are then challenged to keep track of numerous incoming wires and accurately pairing them with each investor in order to have a correct outlook on the fund’s cashflow.
From beginning to end, the capital call process requires clear and easy access to investor data and the ability to carry those figures through as capital call notices are generated, sent out, and as capital is received. Without the right workflow in place, GPs will encounter chaos, and likely during a high-pressure time when they’re working against the clock to secure the capital to close an important deal.
What does a capital call notice look like?
The typical private equity capital call begins with a letter to the investor including brief details about the purpose of the capital call and the entity the fund is looking at acquiring – such as deal stage, company background, and planned acquisition cost.
The notice then lays out the individual investor’s
- Total capital commitment over the fund lifetime
- Call amount for this specific capital call
- Deadline for receiving the capital for this specific call
- Bank, account, and wire details
Following this section, investors should see a full ILPA capital call and distribution template, which goes into deeper detail as to the investor’s full commitment, contributions, distributions, and more.
To see what a typical capital call notice looks like, download our template below.
How Allvue can ease the private equity capital call process
With Allvue’s Fund Accounting software – a cloud-based, multicurrency general ledger – managers can generate capital call notices and other professional investor-ready private equity reports in just minutes.
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