Capital Call – What Investors Should Know

November 30, 20224 min read
Capital Call – What Investors Should Know
Share on facebookShare on TwitterShare on Linkedin

As the formerly exclusive and sophisticated realm of private equity (PE) investing becomes more mainstream, everyday investors are increasingly interested in how they can potentially tap into the potentially high returns often associated with PE ventures. But as with charting any new territory in the finance world, investors must first understand some key terms and how they might be relevant in the context of their very first PE-backed investment. One such term that will almost always be of critical importance is capital call.

Fortunately, as a standard practice among PE and venture capital (VC) funds, capital calls are fairly straightforward and their various applications can ultimately be grasped with little difficulty. Let’s go ahead and take a closer look at what a capital call is and answer some frequently asked questions related to the term. 

What is a Capital Call?

A capital call is a tool used by private fund managers (commonly referred to as “general partners” or GPs) to collect capital from investors (referred to as “limited partners” or LPs) when the fund needs it most. When an LP buys into a PE fund, they will often agree to pay a portion of their investment up front, and to have the remaining balance held to be used at a later date. The LPs upfront payment is referred to as paid-in capital, the total committed amount is referred to as committed capital, and the difference at any given point in the fund’s lifecycle is referred to as uncalled capital

For example, an LP might commit to invest $100K into a PE fund, while only making an initial investment of $25K. In this scenario, the remaining $75K would represent the LP’s uncalled capital. When the GP decides that additional funds are needed, they will make a capital call to the LP requesting a transfer of the additional $75K (or a portion of that amount) into the fund. 

Capital calls allow firms to limit the capital under their management to that which is  actively being invested, and to attract new investors with relatively low initial buy-ins. This is an agreeable arrangement for many LPs, who are often allowed to hold their uncalled capital in low-risk investment accounts to earn modest returns until the capital call is made.

What is a Capital Call in VC?

VC funds use capital calls for the same reasons as PE funds, but by investing in small businesses and start-ups with high growth potential, VC funds have earned a unique reputation for making the right investment at exactly the right time. For this reason, potential VC investors usually understand and accept the necessity of capital calls, and trust their GPs to make the best decision as to the use of their uncalled capital over the lifecycle of the fund. VC funds also commonly offer their LPs preferred returns, allowing them to realize profit from the overall activity of the fund before the need arises to use the entirety of their committed capital. 

Is a Capital Call a Contribution?

A capital call is the action taken by the GP to receive additional or uncalled capital from investors. Once collected, the capital becomes an active contribution into the fund.

How are LPs notified of a Capital Call?

Generally, an LP is notified that the fund will be making a capital call in advance, at which point they will prepare to transfer the requested amount into the fund. If the LP is not prepared to transfer the funds at the designated time of the call, they will be in default and subject to penalties. 

How often do Capital Calls occur? 

GPs typically don’t want to be asking their investors for additional funds on a regular basis, therefore capital calls are usually reserved for critical points in an investment deal, i.e., right when a deal is about to close. Although less common, capital calls can be made unexpectedly due to unforeseen complications related to an investment. 

Rise above Volatility

Diversify beyond the stock market with Yieldstreet.

What Happens if an LP Fails to Make a Capital Call? 

Because capital commitments are usually legally binding, LPs can face a number of penalties if they miss or default on a capital call. The penalties for defaulting are typically spelled out in the limited partnership agreement (LPA) signed by the LP at the time of their initial investment, and can include loss of equity in the fund, interest fees, sale of debt to third-parties, and legal compensation for resulting damages. 

What is a Capital Call Notice?

A capital call notice is a notice sent to LPs to let them know that a capital call is about to be made. Notices are typically received by LPs one week to ten days before the call. The content of a capital call notice will vary from fund to fund, but it will typically inform the LP of the amount they owe related to the call, provide a formal due date for submission of the capital owed, and disclose banking details on where the capital should be transferred.

What is a Capital Call Payment?

This refers to any payment made by an LP to a fund related to a capital call. 

Conclusion

Understanding capital calls and how they work is essential for anyone looking to try their hand as an investor in the realm of private equity or venture capital funds. Importantly, the obligations surrounding capital calls will be unique to each fund, and potential investors should be sure that they understand these obligations as stated explicitly in an LPA before making any financial commitments. 

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure