Capital call

Capital call refers to a formal request made by a private equity fund to its investors (limited partners) to contribute a portion of their committed capital. This request is typically made when there is an investment opportunity or when additional funding is needed. The fund’s general partners will “call” for a specific amount of the total investment commitment that was previously agreed upon by the investors. It is the legal obligation of the investors to provide these funds within a specific timeframe, usually 10-15 days after receiving the capital call notice. This process allows private equity funds to access capital as needed, rather than requiring investors to deposit the entire committed amount upfront.

Pros of Capital Call:

1. Flexibility: Funds draw capital only when needed, reducing idle cash
2. Risk Management: Investors commit gradually, limiting immediate financial exposure
3. Liquidity: Investors retain control of most capital until specific investments occur
4. Strategic Allocation: Enables precise timing of investment deployments

Cons of Capital Call:

1. Unpredictable Cash Requirements: Investors must be prepared for sudden funding requests
2. Potential Penalties: Failure to meet capital call can result in serious consequences like investment forfeiture
3. Administrative Complexity: Tracking and managing multiple calls can be challenging
4. Opportunity Cost: Committed capital may limit other investment opportunities
5. Timing Uncertainty: Investors cannot precisely predict when funds will be requested

Financial Impact: Capital calls require disciplined financial planning and cash reserve management by investors.

How to Handle Capital call in Sharesight:

For example, an investor might commit $500,000 into a private equity fund. This is called capital commitment. But she may pay only $100,000 on signing the agreement. A certain period of time later, the fund may issue a capital call for the remaining $400,000 over a period of years, so the investor can meet her commitments. This means that the cost base of the investment goes up in line with the capital calls.

In the above example, 3 components needs to be taken into account while recording it on Sharesight:

• Committed amount: How much has been agreed i.e $500,000. .
• Called: The amount that has been called I.e $100,000
• Uncalled: Committed amount that hasn’t been called. “There are still $400K that can be called as the project progressed”

To record this on Sharesight:

1. Create a custom investment for the Private Equity.
2. Add the buy or opening balance trade for the called amount i.e $100k (not the committed amount of $500k)

3. Add a capital call trade for all the upcoming capital call notice.

   a. Open the custom investment created.

   b. Go to ‘Trades & Income’ tab and click on ‘Add trades or adjustment’.

   c. Select the ‘Capital Call’ trade type from the drop down menu.

   d. Enter the Trade date, paid on date, capital call value and FX rate (if applicable).

FAQ’s

1. How do I register a partly paid holding and subsequent calls? i.e. the number of shares remains the same, but there are several payments as calls.

   Answer: The initial purchase needs to be recorded as a buy trade and all the subsequent calls can be recorded as capital call trades.

2. There is a negative capital gains showing in the summary section after recording the capital call. I’d expect the price to be increasing by the call value. How can I achieve that?

   Answer: The capital call trade only increases the cost base of the holding but does not affect the quantity and price. As the cost base ↑ and the value remains the same, and hence the loss is recorded. If the total value of the investment increases with every subsequent call, to reflect the correct current value, you need to update the unit price of the fund.

Last modified on March 7, 2025 UTC