Capital call
A request from the manager for LPs to send part of their commitment.
Managers call capital when they need to make an investment or pay fees and expenses, and LPs normally have about ten business days to fund. An LP that misses a call can face penalties under the LPA.
A capital call notice states the amount, the due date, the purpose and each LP's share based on its commitment. Funds usually call capital a few times a year, and often bridge investments first with a subscription line so calls can be grouped.
LPAs set out strong remedies for a defaulting LP, including interest, forced sale of its interest at a discount, loss of future distributions or forfeiture of part of its stake. Defaults are rare among institutions but more likely with individuals, which is one reason managers check investors' liquidity.
Worked example
A $50M fund needs $5M for a new investment and fees. An LP with a $2M commitment, 4 percent of the fund, receives a notice for $200,000 due in ten business days. The administrator tracks receipts and chases one late payer before the investment closes.
Common questions about capital call
How much notice do LPs get for a capital call?
Usually about ten business days, as set out in the LPA. Some funds give longer notice for large calls or for investors who need more time.
What happens if an LP misses a capital call?
The LPA defines default remedies, which can include interest charges, a forced sale of the LP's interest, forfeiture of part of its stake or suspension of distributions. The GP may also cover the gap from other LPs or a credit facility.