What Are Capital Calls in Private Equity?

What Are Capital Calls in Private Equity?

Capital calls—also known as drawdown notices or drawdown requests—refer to the process by which a private equity fund requests committed capital from its investors, known as Limited Partners (LPs).

Why Are Capital Calls Used?

Rather than requesting all committed capital upfront, a private equity fund typically raises money over time as new investment opportunities arise. This allows capital to be deployed efficiently and only when the General Partner (GP) is ready to invest it directly into deals.

Drawing down capital too early—before having a specific investment lined up—can harm fund performance. That’s because:

• The idle capital does not generate returns.
• Management fees are charged on drawn capital, reducing net performance if the funds are not yet invested.

Hence, GPs have a strong incentive to time capital calls closely with deal execution or fee payments.

How Do Capital Calls Work?

When an investor joins a private equity fund, they sign a subscription agreement committing to provide a specific amount of capital over the fund’s life. This commitment is legally binding and irrevocable—except in rare circumstances where a call would breach the fund’s governing agreements.

Capital calls are issued by the GP with notice—typically between 5 and 15 business days—as stipulated in the fund’s Limited Partnership Agreement (LPA). These requests can be made to:

• Fund new portfolio investments
• Pay management fees or other fund expenses

What’s Included in a Capital Call Notice?

Capital call notices usually include:

• The amount each LP must contribute
• The purpose of the capital call (e.g. investment, fees)
• Payment instructions and due date
• Details aligned with the agreed format outlined in the LPA

What Happens if an LP Fails to Meet a Capital Call?

Failure to meet a capital call is considered a serious breach. Penalties can include:

• Loss of ownership rights in the fund
• Reduction or forfeiture of the LP’s investment interest
• Legal action for damages

These measures are in place to protect the integrity and execution of the fund’s investment strategy.

In summary, capital calls are essential tools for ensuring that private equity funds can deploy investor commitments in a timely, strategic, and performance-driven manner. By maintaining clear structures, timelines, and penalties, they help align both GPs and LPs in achieving long-term success.