A capital call (also called a drawdown) is the mechanism by which a GP collects money from LPs. When an investor commits $10M to a fund, that money does not move on day one. It sits in the LP’s account until the GP issues a capital call notice requesting a specific amount, at which point the LP has a defined window, usually ten to fifteen business days, to wire the funds. Capital calls happen throughout the life of the fund as investments are made and expenses are incurred.
The capital call process is governed by the LPA and is one of the most operationally critical functions in fund management. Each call notice must specify the amount being drawn, the purpose (investment, management fees, fund expenses), the wire instructions, and the deadline. Most funds call capital in tranches as deals close rather than pulling the entire commitment upfront. This staged approach benefits LPs because their capital is not sitting idle in the fund’s account earning low or no returns. It stays deployed in their own portfolio until the GP needs it.
For emerging managers, the mechanics of capital calls deserve more attention than they usually get. Your fund administrator typically handles the calculations and notice distribution, but the GP is responsible for timing. Call too frequently for small amounts and you create administrative friction. Call too infrequently and you risk not having capital available when a deal needs to close quickly. Many managers set up a capital call line of credit (a subscription facility) to bridge the gap between when a deal closes and when LP funds arrive, smoothing out the timing mismatch.
The consequences of an LP defaulting on a capital call are severe and spelled out in the LPA. Default remedies typically include forfeiture of a portion of the defaulting LP’s existing interest, forced sale at a discount, and loss of voting rights. Defaults are rare in practice, but they do happen, and having clear default provisions protects both the fund and the non-defaulting LPs. During your fundraise, sophisticated LPs will scrutinize your default provisions because they want assurance that other investors in the fund are held to the same standard.
Frequently Asked Questions
How do capital calls work in private equity?
When an LP commits $10M to a fund, that money does not transfer on day one. The GP issues formal capital call notices as deals close and expenses arise, specifying the amount, purpose, wire instructions, and deadline. LPs then have 10-15 business days to wire the requested funds.
How much notice do LPs get before a capital call?
Most LPAs require 10-15 business days notice before funds must be wired. The call notice specifies the exact amount, whether it is for an investment or fund expenses, and the payment deadline. Some GPs use subscription credit facilities to bridge the gap between deal closing and LP funding.
What happens if an LP misses a capital call?
Defaulting on a capital call triggers severe penalties outlined in the LPA: forfeiture of a portion of the LP's existing fund interest, forced sale at a discount, and loss of voting rights. Defaults are rare but they do happen, and strong default provisions protect the fund and non-defaulting LPs.
