What Is a Capital Call? Meaning, Worked Example and Notice Checklist

A capital call is a fund's formal request that its investors send as part of the money they committed during the fundraise. When you commit to a fund, you do not pay the full amount on day one. The fund calls it in instalments, and each instalment is due by the date in the notice. The notice period, limits and late-payment terms are set in your fund's agreement, so check them before relying on any number here.

Summary

What is a capital call?

A capital call is a request from the fund manager (the general partner, or GP) to the investors (limited partners, or LPs) to pay in part of the capital they committed. Funds call money when they need it, for a deal, fees or expenses, instead of collecting everything up front.

ILPA's private equity glossary treats capital call and drawdown as the same thing: the money is already pledged to the fund, and the call is the act of transferring it. Because the money is already pledged, a call is a demand, not an invitation.

How does a capital call work?

The GP sends each LP a notice for its share of the cash the fund needs, and each LP pays by the due date in the notice. The process runs in five steps:

The GP's right to call is limited by the fund's agreement. In ILPA's Model LPA term sheet, for example, the fund cannot put more than a set share of total commitments into one company without advisory committee consent, and follow-on investments after the commitment period are capped. ILPA's Model LPA uses five years from the first closing as a placeholder commitment period, for each fund to set.

If capital calls at your fund go out by email and payments live in a spreadsheet, Folio's fund management module is where Folio handles capital calls.

What are commitment, called, paid and unfunded capital?

Commitment is the total an investor promised. Called is how much the fund has asked for so far, paid is how much the investor has actually sent, and unfunded is how much of the commitment can still be called. The four balances answer four different questions:

Called and paid differ whenever a payment is late or not yet due. Take a worked example. The fund has $50,000,000 in total commitments. One LP committed $1,000,000, which is 2% of the fund.

The arithmetic: 2% of $7,500,000 is $150,000. 2% of $5,000,000 is $100,000. 2% of $4,000,000 is $80,000. The three calls total 15% + 10% + 8% = 33% of the commitment, or $330,000. Unfunded is $1,000,000 − $330,000 = $670,000. After call 3, the LP has not yet paid, so $80,000 is outstanding, but it still counts as called. Your agreement may define remaining commitment differently, so use its definition.

How much notice do you get, and what if you miss it?

Notice periods are set in your fund's agreement. ILPA's Model LPA, for example, requires notice of a drawdown at least 10 business days before it is due. Treat that as one model's figure, not a rule.

If an LP misses the deadline, the agreement sets the remedies. ILPA's Model LPA term sheet is one template. In it, an LP becomes a defaulting partner if it has not paid within 5 business days of receiving the GP's written notice of the default, and late amounts accrue interest at 10% a year. Both figures are placeholders for each fund to negotiate. The template also lets the GP pursue any other remedy, including forfeiting up to 100% of the defaulting LP's interest. Which remedies apply, and how they can be enforced, depends on your agreement and the law that governs it.

What should a capital call notice show?

In our view, a notice should show who it is for, how much is due and why, when and where to pay, and what remains unfunded afterwards. ILPA's Model LPA term sheet also asks that each notice set out the purpose of the drawdown in reasonable detail. Use this checklist (our suggested list, not a legal standard) on every notice before you pay:

If a notice leaves any of these out, ask the GP before paying.

In our view, keeping these balances right for every LP, call after call, gets harder as a fund grows. See how fund management works in Folio.

How much cash should an LP keep ready?

Suggested default (our view, not a standard): hold the next 12 months of likely calls in cash or in assets you can sell inside the notice window. Use the fund's own call plan if it shares one. The figures below are an illustration.

A shortfall tells you to arrange funds before the next call arrives, not after. If you hold commitments in several funds, for example as a family office investing across funds, run this check for each fund and add the results.

When does this explanation not apply?

This explanation does not apply as written when a fund uses a capital call line, when you invest through a feeder fund or investing platform, or when your agreement says otherwise. It describes one model agreement's terms but does not cover how tax or law applies to your fund.

Capital calls in Folio. If your calls go out by email and you track payments in a spreadsheet, Folio's fund management module is where Folio handles capital calls. See how fund management works in Folio or book a demo.

FAQ

How often do capital calls happen?

It depends on the fund's pace. ILPA's Model LPA uses five years from the first closing as a placeholder commitment period, for each fund to set. In our view, calls cluster in the commitment period, whatever length your agreement sets, because new investments mostly stop when it ends. In the Model LPA, the management fee and fund expenses continue after it ends, and follow-on investments are allowed within a cap.

Does an early capital call lower my returns?

An early capital call can lower your reported IRR. ILPA's guidance on subscription lines explains that delaying a call lifts a fund's IRR, particularly early in its life. So the same deal funded by an earlier call shows a lower IRR. That is one reason to read IRR alongside the LP reporting metrics that matter beyond IRR.

How should I keep my own record of capital calls?

Our suggestion: keep a simple ledger for each fund, one row per call, with the same columns as the worked example above: fund call, your share, called so far, paid so far, outstanding and unfunded. Add the row when the notice arrives, and fill in the paid column only when your payment leaves. The ledger then gives you the unfunded figure to check each new notice against, and the first line of the cash-ready table.

Can the total called go above my commitment?

Calls draw on your unfunded commitment, so in our view you should plan for them to stop at your commitment. The main exception is recallable distributions: if your agreement lets the GP recall money it already paid out, that amount goes back into your unfunded commitment and can be called again. Your total calls can then add up to more than your commitment, while the net amount you have in stays within it. Check the agreement before you plan.

Can a call be netted against a distribution?

Sometimes. When a fund pays a distribution and makes a call around the same date, it may send one net figure instead of two. In our view, ask for both amounts on the notice, so your called, paid and distributed balances stay right.

About Folio

Folio is Incentiv's fund platform for private market investors: VC funds, family offices and their LPs. It covers deal flow, portfolio, LP and fund management. Capital calls sit inside fund management: see Folio fund management.

This post is general information, not legal, tax or investment advice.