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Capital Call

A capital call, also known as a drawdown, is a request from a fund's general partner that limited partners transfer capital they have pledged, to finance an investment or fund expenses. The Institutional Limited Partners Association (ILPA) Principles 3.0 glossary uses the same definition.

Reviewed by José Vasquéz, Managing Partner

Mechanism

A subscription agreement fixes each limited partner's commitment, and the partnership collects it in installments. The ILPA Model Limited Partnership Agreement (October 2019) defines a partner's remaining commitment as its commitment decreased by the capital contributions it has made, with adjustments for certain returned contributions. Section 6.1 makes the remaining commitment, commonly called the unfunded commitment, the ceiling on any call.

Notice

Section 6.2.1 of the Model Agreement requires a written drawdown notice that describes the purpose of the call, with a breakdown among the cost of a portfolio investment, fund expenses and management fees, delivered at least ten business days before the due date. ILPA Principles 3.0 (page 35) states the same floor: a reasonable window of at least ten business days to respond to capital call requests.

ILPA's June 2020 guidance asks for as much notice as possible where no predictable call schedule exists. ILPA's September 2025 Capital Call and Distribution Template replaced its 2011 version, and its companion guidance names the core elements of an effective notice as a cover letter, a description letter and the template.

Default and Remedies

Under Section 6.6.1 of the Model Agreement, a missed payment triggers a written default notice, and the partner becomes a defaulting partner if the failure continues for a bracketed five business days after receipt. Section 6.6.3 adds damages and interest at a bracketed ten percent per annum. Section 6.6.4 lists four remedies: withholding distributions; selling the interest at a bracketed fifty percent of the lesser of contributed capital or value; forfeiture of up to one hundred percent of the interest; and reduction of the commitment to the amount contributed.

The Model Agreement calls itself a starting point to be tailored. The authority for such penalties is 6 Del. C. § 17-502(c), which allows a Delaware partnership agreement to subject a defaulting partner to specified penalties, including a forced sale or forfeiture of the partnership interest.

Subscription Credit Lines

The ILPA Principles 3.0 glossary describes a subscription line of credit as a short-term revolving line secured by uncalled commitments. Section 7.2.1 of the Model Agreement limits borrowing to periods of less than six months, capped at the lesser of a bracketed fifteen percent of total commitments and the remaining commitments, and an optional Section 7.2.2 contemplates a facility under which the lender takes the right to deliver drawdown notices and enforce remedies against limited partners.

ILPA's June 2017 guidance suggests partnership agreements set thresholds such as a cap of, for example, 15 to 25 percent of uncalled capital and a maximum of 180 days outstanding, and measure the preferred return from the date the line is drawn.

Worked Example

In a hypothetical $100 million fund, a limited partner has committed $10 million, or ten percent. The general partner issues a drawdown notice for $12 million to acquire a position. The limited partner's share is 10% × $12 million = $1.2 million, due at least ten business days after the notice, and its unfunded commitment falls from $10 million to $10 million − $1.2 million = $8.8 million.

A credit line changes the timing and the reported figures. ILPA's 2017 notional example, an investment of 100 with annual management fees of 2 and a realization of 162 in year six, reports an internal rate of return of 6.62 percent and a total value to paid-in multiple of 1.45 times with no facility. With a one-year facility it reports 7.14 percent and 1.40 times, and with a two-year facility 7.98 percent and 1.35 times. ILPA attributes the higher rate to the delay in calling capital and the lower multiple to the interest expense the facility adds.

What It Means for a Limited Partner

For a limited partner, an unfunded commitment is a binding liquidity obligation. ILPA's 2020 guidance notes that limited partners may struggle to balance liquid and illiquid assets to meet future calls, and Section 6.6.4 shows that a missed call can cost the interest in the fund. Credit lines make the obligation harder to see.

The same guidance reports that limited partners have identified instances in which actual private equity exposure is as much as two to four percentage points higher once their pro rata share of line balances is counted, and it recommends disclosure of each limited partner's unfunded commitment financed through the facility. ILPA Principles 3.0 adds that limited partners should have the option to opt out of a facility at the onset of the fund. ILPA Principles 3.0 also calls for disclosure of line usage, the line's terms and fund performance excluding the line, so a limited partner can read the worked example's two rates side by side.

The 2017 guidance identifies further issues: unrelated business taxable income exposure for tax-exempt investors when lines remain open for a year or more, and possible joint and several liability if another limited partner defaults.

In Life Sciences and Healthcare

Capital needs in a therapeutics portfolio arrive in steps tied to clinical results, not on a calendar. The FDA reports that Phase 1 studies last several months, Phase 2 several months to two years and Phase 3 one to four years, with approximately 70 percent of drugs moving from Phase 1 to Phase 2 and approximately 33 percent from Phase 2 to Phase 3 (page current as of January 4, 2018).

A follow-on financing round can therefore follow a trial readout on a short timetable. For a fund holding such companies, the ten business day notice period, the size of the remaining commitment and ILPA's request for directional estimates of upcoming calls determine whether the fund can fund a round on the company's schedule.

Governing Authority and Sources

Frequently Asked Questions

What is a capital call in private equity?

A capital call is a request from the general partner for limited partners to transfer part of the capital they pledged. The ILPA Model Agreement requires a written notice stating the purpose, delivered at least ten business days before the due date.

What is an unfunded commitment?

An unfunded commitment is the part of a limited partner's pledge that the fund has not yet called. The ILPA Model Agreement calls it the remaining commitment, the commitment decreased by capital contributions made. In the hypothetical $100 million fund above, a $1.2 million call reduces a $10 million commitment to $8.8 million.

What does a capital call notice contain?

Under the ILPA Model Agreement, the notice describes the purpose in reasonable detail and splits the amount among investment cost, fund expenses and management fees. ILPA's September 2025 guidance adds a cover letter, a description letter, the standardized template, payment instructions and references to relevant partnership agreement sections.

Capital calls shape the growth equity cash-flow cycle. Related entries: Distribution Waterfall, The J-Curve and The Illiquidity Premium.