Capital Call

A closed-end private fund raises binding commitments at closing but holds almost no cash. Capital arrives only when the general partner issues drawdown notices, usually with a settlement window of roughly one to two weeks. Each notice specifies the amount, the purpose, and the wiring instructions, and allocates the draw pro rata across limited partners in proportion to their commitments, so that every investor's percentage of the fund stays constant.

Three quantities must be tracked separately. Committed capital is the total promised at subscription. Paid-in (or drawn) capital is the cumulative amount actually transferred. Unfunded commitment is the difference, and it remains a contractual liability until the commitment period expires or the GP formally releases it. The ratio of paid-in to committed capital, often called the PIC ratio, shows how far a fund has progressed through its investment programme.

Calls fund three broad items: acquisitions of portfolio companies or assets, management fees, and partnership expenses such as legal, audit and deal costs. Management fees are the reason a fund draws capital even before it has invested anything. During the investment period the fee is customarily charged on committed capital, not on the amount deployed, so an investor pays on money still sitting in its own account. After the investment period the base typically steps down to invested capital, net invested cost, or net asset value, and the fee often declines in rate as well.

Many funds also permit recycling: proceeds from early exits or short-held assets can be redrawn rather than distributed, allowing total invested capital to exceed total commitments. Distributions may be structured as returning capital first, which reduces the drag before carried interest begins.

Because private funds control the timing of cash flows, performance is measured with internal rate of return, the discount rate that equates the present value of capital calls with the present value of distributions and residual value. IRR is money-weighted, so shortening the time capital is outstanding raises it mechanically even when the total profit is unchanged. This is why subscription credit facilities matter: the GP borrows at the fund level to close a deal, then calls capital from LPs weeks or months later, compressing the measured holding period and flattering IRR while leaving the multiple on invested capital untouched.

The same arithmetic produces the J-curve. Early years show negative net IRR because fees and expenses are drawn before any asset has been marked up or sold, and only later exits pull the curve above zero.

An unfunded commitment behaves like a written option held by the GP: the LP cannot predict the timing or size of the draw but must always be able to pay. Institutions therefore hold liquidity reserves, maintain credit lines, or model expected call schedules across vintage years. Because average deployment rarely reaches full commitment quickly, many investors deliberately over-commit, promising more than their target allocation so that actual exposure converges on it. That strategy fails when public markets fall, calls accelerate and distributions stop simultaneously.

Candidates should be able to distinguish committed, called, invested and distributed capital; explain why fee bases differ across a fund's life; state why delayed calls raise IRR but not the multiple; and describe the default remedies and secondary-market exit available to an LP that cannot fund.