What is capital call, and how does it work in private equity?

In private equity progress, a capital call is like a financial pit stop, where investors contribute extra capital when needed for new opportunities. But how exactly does it work, and why does it matter? Imagine a group of investors pooling together to explore private equity, venturing beyond the regular stock market, and chasing substantial gains. Here, the "capital call" is the key that keeps their investment journey moving. How? Let’s see,

Decoding Capital Call:? A Closer Look at Private Equity Investments

Understanding the capital call process is crucial for investors venturing into private equity. It ensures timely funding for attractive investment opportunities.

The General Partner (GP) of a private equity fund may issue a capital call , often known as a "drawdown," to the firm's Limited Partner (LP) to solicit further capital contributions. To finance the firm's investments, participants in a private equity fund pledge to provide the fund with a predetermined amount of cash over a predetermined period.

The fund management can use the capital call process to draw down limited partners' commitments to the fund if it's necessary to finance investments in private enterprises or other illiquid assets. The terms and conditions under which capital calls can be issued are often spelled out in the fund's documentation, such as the Limited Partnership Agreement (LPA).

Purpose of Capital Call

For a private equity fund, the primary goal of a capital call is to raise money to use in making investments and implementing the fund's investment plan. A Capital call allows private equity firms to acquire money on demand and deploy them when favorable investment opportunities present themselves, which is important given that they often engage in illiquid and long-term projects.

Capital calls serve as a way to align the interests of limited partners and fund managers, showcasing commitment to the fund's objectives.

The interests of the general partner and the limited partners can be brought into harmony through capital calls. Limited partners support the fund's investment strategy and goals by providing initial cash and additional capital as needed.

The capital call process typically follows these steps:

Fundraising

Fundraising is the process through which a private equity fund's general partner (GP) solicits investment from potential limited partners (LPs). Limited Partners (LPs) agree to invest a set amount of money in the fund over a set period.

Investment Deployment

Once the fund begins investing, the GP will look for opportunities and use the committed funds to buy shares in private firms or other assets.

Investors should carefully evaluate their capital commitment and risk tolerance before participating in private equity capital calls.

Capital Call Notice

The GP will use the funds upon capital receipt to make new investments or provide ongoing assistance to portfolio firms, as detailed in the capital call announcement. The capital call amount and due date for each LP are outlined in this announcement.

Contribution Period

Limited Partners (LPs) are given a certain amount of time—typically between 10 and 30 days—to respond to a capital call and make the required capital contribution. They can wire the money or use other mutually agreed-upon means to send it to the specified fund account.

Investment Execution

Upon capital receipt, the GP will use the funds to make new investments or provide ongoing assistance to portfolio firms, as detailed in the capital call announcement.

Private equity investments offer the potential for higher returns, but investors must conduct due diligence and align with their financial goals.

Reporting

The fund manager reports to the limited partners on the investing activities and performance of the fund on a regular basis.

Tech Startups Embrace Decentralized Finance for Capital Calls in 2023

In 2023, the way startups raise money is changing in a revolutionary way.? Tech startups are turning to decentralized finance (DeFi ) to raise money more democratically and efficiently.

In the past, when startups needed money, they approached venture capitalists and angel investors . But since DeFi's success, startups are turning to smart contracts and tokenization based on the blockchain to reach a broader range of investors worldwide.

One of the best things about DeFi-enabled capital calls is that there are no middlemen. Using blockchain technology, startups can create smart contracts programmed to carry out investment agreements when certain conditions are met automatically. This cuts administrative costs and makes it easier for startups and their investors to see what's happening.

Also, tokenization makes fractional ownership possible, meaning smaller investors can participate in capital calls with smaller investments. This makes the process of investing more democratic and open to more people.

But switching to DeFi has challenges, such as worries about regulations and holes in smart contracts. Still, the fact that more tech startups are turning to DeFi for capital calls in 2023 shows that the industry is always trying to be innovative and flexible in a world of finance and entrepreneurship that is constantly changing.

Have you used DeFi? If yes, how’s your experience so far? Please comment on your thoughts.?

How can Eqvista Assist me with capital calls and issuing shares?

The purpose of Eqvista’s application system is to replace the conventional methods through which businesses submit their data and process things manually by consuming time. Tasks that usually take days to accomplish might be finished quickly using our platform.??

Eqvista's goal is to simplify the complicated infrastructure, execute the fund's investment plan, raise the necessary funds at ease, and seize the opportunities. So, when favorable investment opportunities arise, the fund can quickly acquire the capital it needs.?

Contact us right now if you're interested in finding out more about our services .

Have you ever been part of a capital call process, either as an investor or within a company? Share your experiences or any questions you may have about capital calls in the comments below!