Understanding Capital Calls: A Step-by-Step Guide for Fund Managers and LPs

What are capital calls?

Every limited partner relationship starts the same way: you commit to a fund. Say $50 million. You confirm it to your GP, sign a Limited Partnership Agreement, and... wait. That commitment isn't deployed immediately. In fact, capital is called during the investment period as and when the fund requires it for investments, management fees, and fund expenses.  

A capital call notice is a formal communication from the General Partner (GP) to Limited Partners (LPs), requesting that they transfer a specified portion of their committed capital to the fund. They send a notice: "We need $X million from you, by [date]."

Commitment vs capital call: understanding the difference

Before moving further with Capital calls, it is crucial to understand the distinction between your commitment and the capital calls. This is the first thing that confuses new LPs.  

The distinction matters because:

1. The GP controls the timing. The GP decides when to call capital, how much, and how fast. This is where relationship stress happens. A GP might call capital aggressively to deploy quickly, or conservatively to give LPs time. Either approach has trade-offs.

2. The LP cannot refuse to fund after committing. If the LPA includes a capital call provision (as it does), the LP is legally obligated to contribute when called, Failure to do so constitutes a breach of contract.

Let's look at how a capital call flows.

How a capital call works? Step-by-step process

Step 1: The GP identifies a capital need

A fund's General Partner (GP) evaluates available cash against upcoming investments and determines how much capital to request from Limited Partners (LPs).  

Maybe they've identified a deal they want to invest $100M in, and they have $40M cash in hand. They need $60M more. So, they calculate how much to call from LPs.

If the fund has $500M committed capital, and they need $60M, that's 12% of the fund. Each LP gets called for 12% of their individual commitment.

If you committed $50M, you get called for $6M (12% × $50M).

Other triggers for capital calls:

• Management fees due (usually an annual fee)

• Fund expenses.

• Legal and administrative fees

• Reserves for future obligations

Step 2: The GP drafts the notice  

The capital call notice needs to be precise. It typically includes:  

1. Cover letter: Purpose of the call (investment, fees, reserves, etc.)  

2. Amount due: Both in dollars and as a percentage of your commitment  

3. LP details: Total commitment, previously called amount, currently unfunded capital.

4. Wire instructions: Exact bank account, routing number, and a unique reference code.

5. Payment due date: Usually 10-14 days after the notice is issued.

6. Special instructions: References, checks to include, and any other documentation.

The ILPA (Institutional Limited Partners Association) has published templates for capital call notices. Most sophisticated GPs use these templates, which reduces errors and confusion.  

Step 3: Verification of the notice

Once the GP sends notice via fund portal or mail, it is the LP's responsibility to review it before wiring the funds.

Here’s what to inspect:

1. Authenticity: Check that it comes from your actual GP, not a phishing email. This sounds obvious, but it happens. Criminals have impersonated GPs.  

2. Accuracy in Calculations:
   a)The amount called doesn't exceed your total commitment except for fees and expenses that are outside the scope of the commitment.  
   b) Your pro-rata share is correct.  
   c) The notice matches your LPA terms (e.g., maximum callable in a period)
3. Verify the timing: Does your LPA require a notice period? Do you have legal grounds to contest the call?  

Step 4: Liquidity planning

Now your team needs to get a $6M in cash to your GP. Ensure that sufficient liquidity is available to meet the capital call obligation in a timely manner. If necessary, the LP may:

• Redeem funds from liquid investments

• Transfer funds internally

• Arrange for short-term liquidity facilities or financing to satisfy the funding requirements.

Some GPs use "capital call lines," a short-term credit facility that help them bridge capital calls. This solves the liquidity timing issue by deferring calls to LPs. LPs can use “LP financing” later, which is rare and distinct.

Step 5: LP executes the wire

This is the moment. You wired $6M to the GP's designated account. It is a crucial step; being extremely careful with all the details is necessary.

Common Pitfalls:  

• Typo in wire instructions: Money goes to the wrong account. You now have a recovery nightmare; it takes 5-30 days to reverse it.

• Timing: A wire from your bank takes 1-3 business days. If you send it on Day 9 of a 10-day window, it might not clear in time.  

• Reference code missing: The money arrives, but the GP can't identify which LP sent it. Now they must manually reconcile the code.

• Partial funding: You sent $5M instead of $6M, maybe a processing error. As a result, the remaining $1M is considered outstanding.  

• Surplus funding: A fund calls $10M from an LP, but the LP wires $10.50M by mistake, the surplus amount will be applied in accordance with the terms of the LPA.

Modern fund administrators now use automated portals that allow LPs to wire funds directly, reducing manual errors. Qapita is one such portal that provides a seamless experience for your fund management.

Step 6: GP reconciles and confirms

The GP receives the wire. The fund administrator reconciles the payment against the capital call notice. Once everything matches, they send a confirmation to the LP: "We received your $6M capital call payment on [date]."

Now the fund has the cash and can deploy it.

The legal foundation: Lpa, policies, side letters

Everything about capital calls is governed by the Limited Partnership Agreement.

Your LPA spells out:

The GP's right to call capital:

• Maximum amount the GP can call in each period (usually unlimited, but some LPAs cap annual calls at 50% of commitment)

• Notice period required (typically 7-14 days before the due date)

• Due date for payment (typically 10-14 days after notice)

Your (the LP's) obligations:

• You are required to fund capital commitments when called, in full, and within the specified time frame.

• All the payments must be made from your own resources; the GP will not delay or wait for the liquidation of other investments.

• You must provide accurate wire instructions and coordinate with the GP

Default consequences:

• Interest on any unpaid capital commitments shall accrue as specified in the LPA (rates vary from 5% to 10%+ annually). Possible forfeiture of prior capital contributions

• Dilution of your ownership stake if other LPs fund additional amounts (overcalls) to cover the shortfall.

• Possible litigation costs

• The GP may have the right to sell, redeem, or cancel the defaulting LP’s interest, sometimes at a discounted price, as provided in the LPA.

Side letters

A side letter is a separate legally binding agreement between the fund (or GP) and a specific investor that modifies or supplements the terms of the LPA as they apply to that investor.

It is important to note that:

• Side letters do not amend the LPA for all investors.

• They apply only to the investor who negotiated them.

• They must not violate the core provisions of the fund documents.

Common provisions in Side Letters:

• Reduced management fees

• Carried interest discounts

• Reduced interest or penalty on Late Payments

• Exemption from certain capital calls.

Calculate the capital call

The GP needs to decide: how much to call, and from whom? Here’s the simplified process:

Scenario 1: Basic pro-rata call

Fund committed capital: $500M, 10% of the fund is needed, i.e. $50M.  

Each LP pays their share based on the total commitment, this is fair and standard across the industry.

Scenario 2: Call including expenses

Let’s take the same fund and say this time it needs $40M in investment and owes $5M management fees for the year. The total need is $45M, which is 9% of the fund.  

The fees will be allocated on a pro-rata basis; no separate notices will be sent.

Scenario 3: Complex calls (main fund + spv/co-invests)

Imagine an LP (investor A) is part of two investment vehicles:

Main fund: $400M total commitments, this deal requires $80M.

SPV (Special purpose vehicle): $100M total commitments, this deal requires $20M.

How capital calls work:  

1. The GP usually calls from the main fund first.

2. The LP may get two separate capital calls: ‍

Main fund: $40M which is 10% of $400M

SPV: $10M which is 10% of $100M

3. Some funds send separate notices for each call, others send a combined notice, so the LP sees the total amount at once.  

Multiple closings & equalization

Many private equity funds raise capital in multiple closings over time. Early investors fund deals and begin earning returns, while later investors join after some capital has already been deployed. This timing difference can create inequity, since late investors did not participate in earlier investments.  

Equalization is the mechanism used to ensure fairness. It adjusts the capital contributions of late investors, so they are treated as if they had been part of the fund from the beginning. This includes:

• Charging late investors, a pro-rata share of earlier capital calls

• Applying interest or compensation for the time value of capital.

Through equalization, all investors regardless of when they joined receive proportional returns, and early investors are compensated for deploying their capital sooner. In essence, equalization maintains equity, transparency and consistency across multiple fund closings, preventing disputes and ensuring all investors are treated fairly.  

This is complex and is a major source of disputes. Fund administrators spend a lot of time getting equalization calculations right. Even small errors (wrong interest rate, wrong dates) lead to LP complaints.

Foreign exchange challenges for global LPs

If you're a global LP investing in a US dollar-denominated fund, you face FX risk on capital calls.

Scenario: You're a UK pension fund. You committed £50M to a US fund. The fund makes a capital call in USD: $6M.

When you need to convert £50M to USD to fund this call, the exchange rate might have moved. If GBP has weakened against USD, you now need more GBP to buy the same $6M. This effectively increases your capital call costs.

Additionally:

• Wire fees: Converting GBP to USD and wiring has fees (typically 0.1-0.5% of the amount)

• Timing mismatches: If you're converting currency, you need to account for T+2 settlement times

• Multiple accounts: You might have USD accounts in the US and GBP accounts in the UK, requiring currency conversion to optimize costs

• Bank Charges:  They charge 0.5-1% on conversion; being ready for this is necessary.  

• Exit Taxation: When the fund redeems your capital, any FX gains embedded in the proceeds will be taxable in your home country. This should be clearly understood.  

Most global funds ask LPs to fund from USD accounts directly (if they have them) to avoid FX friction. The LPA might even specify that "capital calls are due in USD, and all FX conversion costs are borne by the LP."

When capital calls go wrong: Common issues

Despite best intentions, capital calls frequently go sideways.

Issue 1: Email lands in spam

The capital call notice is marked as spam because the GP's email domain isn't configured properly. The LP doesn't see it. By the time they notice, the deadline has passed.

Fix: GPs should use confirmed, whitelisted email addresses. LPs should add the GP's email to their contacts. Both should use portals, not email.

Issue 2: Wrong wire instructions

The LP copies the bank account number from the email. But there's a typo, a missing digit, or a wrong digit. The money goes to the wrong account. Now the LP has $6M sitting in a random bank account. Recovering it is a nightmare.

Fix: Use a portal. Never copy/paste bank account numbers. Verify with the GP before wiring. Some funds require LPs to call to confirm wire instructions.

Issue 3: Timing delay in fund transfer  

The LP intends to wire on Day 8. But they're not in the office that day. They wire on Day 11. The wire takes 2 business days to clear. It arrives on Day 13. They're now 3 days late.

Fix: Wire earlier than you think you need to. Leave buffer time. Some LPAs have automatic grace periods; don't count on yours.

Issue 4: Equalization disputes

During the second close, the GP applies an equalization charge. The LP may dispute the interest rate applied or the calculation of the amount they were deemed to have contributed to the first call.  

Fix: Get clarification upfront on equalization mechanics. Ask for the detailed calculation. If it doesn't match your understanding of the LPA, push back immediately.

Issue 5: Multi-currency calls

The fund calls capital in both USD (main fund) and EUR (European fund). The LP must coordinate multiple wires, multiple conversions, and multiple timing considerations. One wire is clear, the other isn’t.

Fix: Consolidate if possible. Some LPs establish accounts in the fund's preferred currency to reduce conversion hassle.

Default triggers & consequences

The LPA specifies what counts as a "default" and what the consequences are.

Common default definitions:

• Failure to fund within the notice period (usually 10-14 days)

• Failure to fund after grace period expires (usually 7-14 additional days)

• Repeated failures to fund (some LPAs give one miss, then enforce on second miss)

Common consequences (in order of severity):

1. Interest charge: Interest shall accrue on any unpaid capital call amount at a rate of 5% - 10% per annum.  

2. Grace period revocation: If you had one grace period, you might not get another.

3. Distributions withheld: Any cash distributions you would receive get applied to your default.

4. Dilution: Other LPs can overcall, fund your missed capital call and receive your ownership stake.

5. Equity forfeiture: You lose your entire LP interest in the fund (the nuclear option).

6. Litigation: The GP sues you to recover the capital call plus interest plus legal fees.

Real example:

An LP commits $100M. They fund $40M on the first call. They miss the second call for $30M.

After the grace period, the fund applies $30M + interest + any distributions owed to settle the default. The LP's ownership is diluted because the fund reduced their equity stake as penalty.

If the LP had received distributions during this time, those are withheld and applied against the default.  

If the LP continues to refuse, the GP invokes the forfeiture clause. The LP loses the entire $40M already invested.

Most defaults don't go this far. LPs understand the stakes and fund when called. But the penalties are severe enough that defaults are rare.

Building systems that prevent errors

If you're a GP managing capital calls, here's what matters:

1. Use a standardized template

The ILPA publishes a template. Use it. It reduces LP errors and shows professionalism.

2. Include all necessary information

• Amount due

• Pro-rata percentage

• Cumulative amount called to date

• Unfunded capital remaining

• Wire instructions

• Due date with clear language

3. Give notice early

Don't surprise LPs with capital calls. Provide advance notice. Some GPs give LPs a "notice of intent" 30 days before the actual capital call notice. This gives LPs time to prepare.

4. Use a portal

Email is for backup. Use a portal as primary too for automated reminders, dashboard visibility and reconciliation. This helps in reducing errors.

5. Follow up on non-payment

Have a process: Day 5 check-in, Day 10 reminder, Day 12 escalation, Day 15 enforcement. Don't be passive.

6. Communicate

If an LP misses a deadline, call them. Ask why. Maybe the notice got lost. Maybe they have a legitimate issue. Most can be resolved with a conversation.

7. Document everything

Keep records of notices sent, payments received, dates, amounts, any waivers or grace periods granted. This protects you in disputes.

Best practices for fund managers

If you're running a fund, capital call management directly impacts:

• Fund performance (faster deploys lead to better IRRs)

• LP relationships (efficient processes build trust)

• Your reputation (if capital calls are chaos, LPs will avoid your next fund)

Best practices:

1. Forecast capital needs 90 days in advance. Tell LPs what's coming. Reduce surprises.

2. Call conservatively early in the fund. The first 2-3 calls should be manageable to help LPs get used to your process.

3. Call more aggressively if deals are flowing. Once LPs see you deploying well, they're comfortable with larger calls.

4. Consolidate calls where possible. Instead of calling 3 times in one month, combine into 1 or 2 calls.

5. Respect LPs' cash management. A $100M call on Friday with a 10-day due date is hostile. Give real time.

6. Automate with a good portal. This is worth the investment. Reduces errors by 80%.

Summing-up

Capital calls form an operational backbone of private funds. They're where the commitment becomes real and if overlooked, errors can cascade quickly.

For LPs, the takeaway is simple: Treat capital call notices with the urgency they deserve. Set up systems to catch them. Coordinate internally so your CFO knows when they're coming. Build relationships with your GP's operations team. Ask questions if the math doesn't look right.

For GPs, it’s important to make capital calls frictionless for LPs. Use portals. Provide notice. Over-communicate and seek to reduce errors. The administrative effort is small compared to the relationship damage when a capital call goes wrong.

Capital calls aren't glamorous. But they're the plumbing that keeps the whole system working. Get them right, and everything else flows smoothly.

FAQs about capital calls

Q: Can I refuse a capital call?

No. If you've signed the LPA and committed to the fund, you must fund when called. Refusal is a breach of contract. The consequences are severe.

Q: What if I don't have the cash on the due date?

Contact the GP immediately. Explain your situation. Most GPs will give a short grace period (7-14 days). Some allow you to use capital call lines (short-term loans against your commitment). Don't just miss the deadline and hope.

Q: Can I reduce my commitment to avoid future capital calls?

Rarely. Most LPAs don't allow commitment reductions. You're stuck with your commitment for the fund's life (usually 10 years). That said, some LPs have negotiated custom terms allowing limited reductions in certain circumstances.

Q: What if the GP calls much more than I expected?

This is a question about LPA terms. Your LPA may have caps (e.g., "maximum annual capital call is 50% of commitment"). If the GP exceeds these, you can dispute it. But most LPAs are written to give GPs broad calling power.

Q: Can I pool capital calls with other LPs?

In theory, yes. In practice, no. Each LP has their own commitment and their own capital call. You can't combine. (Though you might coordinate the wire with other LPs going to the same GP to reduce operational hassle.)

Q: Does my capital call include management fees?

Yes, typically. Management fees are usually called as part of regular capital calls. The notice will break down: "Investment capital: $X, Management fees: $Y, Total capital call: $X+Y."

Q: What about equalization interest? Is it negotiable?

Yes. The interest rate is typically specified in the LPA (often 8-12%). But it's negotiable at closing. Some LPs with strong bargaining power negotiate lower equalization rates.

Q: If I miss a capital call, can I be removed from the fund?

Not permanently removed, but your interest can be forfeited (per the LPA). Other LPs can overcall and take your stake. You lose your investment.

Q: How do I know if I'm being called fairly (pro-rata)?

Ask the GP for a cap table. Your capital call should match your pro-rata ownership percentage. If it doesn't, push back.  

Q: Can a GP call capital after the fund's investment period?

Typically, no. Once the investment period closes (usually 5-7 years), the fund stops making new investments. The GP can call for follow-on investments, portfolio company support, fees, and reserves, but not for new company investments. Your LPA specifies this.

Q: What if other LPs don't pay their capital calls?

That's the GP's problem to solve (through dilution, interest, forfeiture, etc.). It doesn't directly affect you, but it might dilute your ownership percentage if the fund reduces total AUM due to non-payments.