What To Know About Capital Calls
Capital calls are a key part of fundraising in private equity investing. With a capital call notice, fund managers and general partners can request committed capital from investors to either fund new investments or cover operating expenses.
Understanding and streamlining the capital call process is essential for private equity firms: Confusing processes and delays can result in a poor experience for investors, which can lead to the loss of current or future investments.
But before you start calling investment capital into your fund, it’s important to have a strong handle on the basics. Below, we’ll break down capital calls: what they are, how they work, and how they impact investment strategies.
What is a capital call?
A capital call (sometimes called a drawdown) is a request for capital contributions from fund investors who have already committed — but not paid — a certain amount of capital to the fund.
For private equity funds, capital calls are a key tool for raising additional capital. They’re commonly used to fund new investments and capitalize on investment opportunities, but they can also cover fund expenses as they arise.
Let’s say an investor commits $1 million to a private equity fund. Upfront, they’re only required to pay a small percentage of this commitment. Later, the fund identifies a new investment opportunity requiring additional funds. The manager issues a capital call, requesting $200,000 from the investor. The investor then transfers the amount by the capital call’s due date, providing the money needed to proceed with the investment.
How do capital calls work?
Private equity and venture capital firms must follow a very specific process when requesting a portion of an investor’s capital commitment:
- Initiation: The process begins by assessing the need for additional capital based on investment opportunities or operational requirements. This assessment is used to determine the amount of capital you need to request.
- Notification: The fund manager then issues a formal capital call notice to investors detailing the amount required and the due date for payment. This notice should also include instructions on how to transfer funds — typically via bank transfer or ACH.
- Payment: Once a capital call notice has been issued, investors must transfer the requested funds by the specified deadline. The fund manager will then verify the receipt of the funds.
- Deployment: Once funds are received, the fund manager can use them for the intended investments or operating expenses.
As you can see, there are two primary players in the capital call process: investors (limited partners) and fund managers.
Fund managers determine the specific need for additional capital, issue formal notices and communicate with investors, and confirm that funds have been received. Investors, on the other hand, are responsible for reviewing the capital call notice and transferring funds by the due date.
With a tool like WealthBlock’s investment portal, fund managers can streamline the capital call process by handling everything in one location (and, in many cases, a single sitting). WealthBlock also provides a secure and compliant way to share documents with investors, and it allows general partners to add security features like multi-factor authentication.
WealthBlock’s investor portal also allows investors to view capital call progress and receive automated reminders regarding amounts owed and their due dates. This helps create a more transparent process less prone to delays and errors.
Why are capital calls essential for private equity investments?
Capital calls enable private equity and venture capital funds to take advantage of new opportunities, ensure smooth ongoing operations, and improve deal flow management by providing:
Fund liquidity
The first (and most obvious) benefit of capital calls is that they provide funds with liquidity. You can’t pay the bills or pursue new investments with uncalled capital — no matter how much your investors have committed on paper.
But with a capital call, you convert that committed capital into actual cash flow for your fund to use.
It’s always important for private equity funds to maintain a certain degree of liquidity. You never know when an investment opportunity or unexpected expense will pop up, and management fees alone may not be enough to cover these costs.
By soliciting committed capital from investors, funds can ensure they always have an adequate amount of cash available.
Investor commitment alignment
Capital calls ensure that investors remain committed to their pledged capital. Without them, capital commitments from investors are just metrics and numbers on a piece of paper.
But they’re also useful for informational purposes, keeping investors engaged and aligned with the fund’s strategic goals — which can encourage repeat investments. They help investors understand what is going on with their current investments and how their capital is being used.
Investment risk management
The ability to solicit funds when you need them makes everything your firm does a little less risky. Timely capital calls serve as a sort of lifeline for private equity firms, and it’s one that you can reach for to reduce risk and enable better portfolio management.
With capital calls, you can boost your fund’s cash flow as needed to fund a wide variety of expenses and opportunities. This can mitigate investment risks in a few ways: For example, if one or more of your portfolio companies is facing short-term challenges, you could use a capital call to inject them with additional funds to help them stabilize.
Or, you might use the funds from capital calls to diversify your fund’s investments so the risk is spread out.
How do capital calls impact investment strategies?
Capital calls let you control the flow of capital into your fund, making them a pillar of any fund’s overall investment strategy. Here’s how capital calls directly impact your investment strategies:
Timing of investments
With strategically timed capital calls, you can ensure that you have easy access to funds when investment opportunities arise. But to do this, you’ll need to align the timing of your capital calls with market conditions and investment prospects.
When you decide it’s the right time to issue a capital call, a tool like WealthBlock can help you execute the process quickly, correctly, and efficiently. By issuing capital calls digitally with a single push of a button, you can improve your capital call timing and respond to investment opportunities with even more agility.
Financial planning and forecasting
Capital calls play a key role in effective financial planning and forecasting — this is true for both fund managers and investors. For fund managers, anticipating capital call schedules helps with budgeting and managing cash flows. Investors also benefit from predictable capital calls, since it allows them to better manage their financial commitments.
Financial models and forecasting software can help you predict and manage capital call schedules. This will create a more structured and predictable approach to issuing capital calls that fund managers and investors both appreciate.
Administrative efficiency
Without the right tools and strategies, managing capital calls can quickly become a major administrative headache. It spreads your team thin and reduces the amount of time they have available to focus on other growth initiatives — like investor relationship management.
WealthBlock’s investor portal can make issuing and managing capital calls more efficient and less time-consuming. Our all-in-one platform provides a variety of features that are ideal for efficient capital call management, allowing you to:
- Create custom capital call notice messages.
- Issue capital calls digitally with one button.
- Enable online money transfers via ACH (or provide wire instructions to investors).
- Monitor capital call progress in real time.
- Schedule automated follow-ups.
These tools not only reduce your fund’s administrative burden but also ensure capital calls are managed efficiently and effectively for both your fund and its investors.
Embrace more efficient capital call management with WealthBlock
Managing capital calls correctly is a vital key to success for any private equity firm, and WealthBlock’s comprehensive investor CRM makes the process easier than ever.
Thanks to features like automated notifications and reminders, centralized document management, and real-time tracking and reporting, WealthBlock helps funds execute timely capital calls transparently, securely, and efficiently.
Ready for more effective capital call management? Sign up for a free trial of WealthBlock today.
