Capital call
Also called Capital contribution, Drawdown, Unfunded commitment.
A capital call is a demand on partners to fund committed equity, at closing or in stages as the business plan needs it. Calling capital later rather than all at once raises the internal rate of return without changing the equity multiple, and failing to fund a call carries penalties written into the operating agreement.
How it works
Staged calls exist because idle capital earns nothing inside a deal. A renovation drawn over eighteen months does not need its funding on day one, so a structure that calls it as it is spent leaves the money with the investors until it is needed. The effect on returns is real and it is purely arithmetic: the same dollars contributed later are discounted less, so the IRR rises while the multiple, which has no opinion about time, does not move at all.
The mirror image is a call nobody planned for. A cost overrun, a covenant cure, an interest reserve that ran dry, a large tenant lost in a rollover year: each one produces a demand for money at exactly the moment the deal is not performing. Whether the agreement permits a call for those purposes, and how much notice partners get, is a term to read before signing rather than during.
The remedies for a partner who does not fund are severe, and that is why the clause matters. Dilution at a punitive rate, conversion of another partner's contribution into a priority loan accruing at a high rate, or loss of voting rights are all standard, and any of them can transfer most of a defaulting partner's economics. A limited partner should size its commitment against its own liquidity in a bad year rather than in the base case.
Formula
Unfunded commitment = total commitment - capital contributed to date- The equity multiple uses total contributions, so a staged schedule does not change it
- IRR uses the date of each contribution, so a staged schedule raises it
- A preferred return normally accrues from the date each contribution is funded, not from the commitment date
Worked example
Illustrative. $20,565,000 of equity and $34,000,000 returned at the end of year five. In the second column $2,565,000 of that equity is called at the end of year one instead of at closing.
| Total equity contributed, either way | $20,565,000 |
|---|---|
| Total distributions, either way | $34,000,000 |
| Equity multiple, either way | 1.65x |
| IRR with all equity funded at closing | 10.58% |
| IRR with $2,565,000 called a year later | 10.85% |
Twenty-seven basis points from the funding schedule alone, with nothing about the property changed. It is a genuine benefit to the investor, and it is also a reason to read every IRR next to its multiple, because the multiple is identical in both columns.
Conventions worth knowing
- Model contributions on the dates they are actually called. An IRR built on a single day-one outflow understates a staged structure.
- Read the default remedy before committing. A dilution or priority-loan provision can transfer most of a partner's economics on one missed call.
The common mistake
Committing to capital that is only affordable in the base case
An unfunded commitment is an obligation, and the calls that hurt arrive in the year the plan is behind, frequently at the same moment as calls on other investments in the same market for the same reason. A limited partner sized to its base case discovers the problem when three sponsors call at once. Size a commitment against the downside case and against the rest of the portfolio, and ask the sponsor what the largest unplanned call in the structure could be and what triggers it.
Related terms
- Distribution waterfallA distribution waterfall is the ordered set of tiers that determines how cash is split between limited and general partners. Each tier is filled completely before any money reaches the next one, and the general partner's share rises as it goes.
- Preferred returnA preferred return is a threshold rate of return that limited partners receive on their capital before the general partner participates in profits beyond its own pro rata share. It is a priority in the distribution queue, not a promise that the money will be there.
- Internal rate of returnThe internal rate of return is the discount rate at which the net present value of a deal's cash flows equals zero. It expresses a full investment, including the timing of every contribution and distribution, as a single annualized percentage.
- Equity multipleThe equity multiple is total distributions divided by total equity contributed, expressed as a multiple. A 2.0x means an investor received two dollars back for every dollar put in, counting the original dollar.
- ClawbackA clawback requires a general partner to return promote it has already been paid when the final result shows it was not earned. It exists because deal-by-deal waterfalls pay promote on the winners before the losers are known.
- Sources and usesA sources and uses statement lists every dollar going into a transaction and every dollar it pays for, and the two columns have to be equal. Uses are the purchase price plus all the costs of closing and funding; sources are the debt and whatever equity is left to fill the gap.
Every figure, traced to its source
Altyst computes these in exact decimal arithmetic, not with a language model, and clicking any number shows the formula behind it.