Glossary - Capital Call
A capital call, also known as a drawdown, is a legal right that private equity firms, venture capital firms, and fund managers have to demand a portion of the money promised to them by an investor. It is used to secure capital from investors to fund new investment opportunities, manage expenses, or strengthen the fund's cash position. Typically, this happens after the fund has identified a new investment and needs the capital committed by the investors to proceed.
Also known as
- Drawdown
Use cases examples
- Limited Partnership Agreement: Pursuant to Section 5.3 of the Limited Partnership Agreement, the General Partner hereby issues a capital call notice to all Limited Partners for their commitment share of the new investment round.
- Subscription Agreement: Under the terms outlined in the Subscription Agreement, the Investor agrees to fulfill any capital calls made by the Fund within 10 business days of notice, subject to the terms and conditions set forth therein.
Considerations for investors
- Investors should assess their ability to meet potential capital calls in line with their liquidity and investment strategy to avoid defaulting on their commitments.
- Consider the track record and investment strategy of the fund or the company making the capital call to ensure it aligns with their investment goals and risk tolerance.
Considerations for founders
- Understand the timing and conditions under which capital calls can be made to ensure sufficient liquidity is available to meet such calls.
- Be aware of the implications for failing to meet a capital call, which can include dilution of stake in the fund or company, or other penalties as specified in the investment agreement.
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