Capital call
What is it?
Refers to a request by an investment fund to its investors to contribute additional capital to the fund. Capital calls typically occur when additional funds are needed to finance specific investments or projects. This process is common in private equity funds, real estate investment funds, or venture capital funds, where investors commit to contributing a certain amount of money in different phases, rather than a single initial investment.
When the fund needs capital for new investments, it makes a capital call to its investors, who must fulfill their commitment and contribute the requested funds within a set period. Investors have the option to comply with the capital call or, in some cases, may decide not to participate, which could affect their ownership percentage in the fund.
Key aspects to consider
Capital calls are an essential part of the operation of many investment funds, as they allow the fund managers to access the necessary capital to execute their investment strategy flexibly. This mechanism helps funds maintain a continuous cash flow to finance new opportunities without having to resort to external sources of financing, which could be more expensive.
The capital call process also ensures that the fund only raises the funds it needs at a given time, avoiding the accumulation of unused capital. Investors, for their part, must be prepared to make these contributions as requested, as their future participation in the fund depends on it.