I recently encountered a financial squeeze due to poor management of my private investment capital commitments, which has led me to share some effective strategies for ensuring liquidity.
For those either new to investing in private funds or considering expanding their private fund portfolios, it’s vital to grasp and adeptly handle capital calls.
What are Capital Calls?
A capital call is when a private fund asks you to provide a portion of the money you’ve pledged, like 10% of a $100,000 commitment. Usually, over a span of three years, the fund will request the full amount committed as it identifies new investment opportunities.
My Own Financial Challenge
Since 1999, I’ve been a proactive investor, typically keeping a small amount of cash in my checking account, with the majority of my assets in an S&P 500 ETF and private real estate funds.
However, when Treasury bond yields soared above 5%, I shifted my remaining liquidity into Treasuries, leaving my checking account with barely enough to cover a month’s expenses. The issue arose when I received a $20,000 capital call from a venture capital fund. To fulfill this obligation, I had to move funds from a joint account designated for expenses related to our Lake Tahoe vacation home.
Addressing Heftier Capital Calls
Soon after, I faced a $61,351 capital call, which was 20% of my $300,000 commitment to another fund. With my checking account running low, I had to think outside the box. I scrutinized all my financial accounts, checked the maturity dates of my Treasury bonds, cashed in a gift check, and even boosted my income through consulting and coaching gigs.
Seeking Solutions
The effort to scrape together the necessary funds was a revelation, showing me the amount of dormant cash in households and the potential to unlock more income when pressed.
Dealing with Overdue Payments
Throughout my investment journey in private funds, there have been times when I’ve missed capital calls, often due to overlooked email notifications. Luckily, I’ve never been penalized, indicating there might be a leniency period for fulfilling these financial commitments.
Understanding Capital Calls and Private Fund Dynamics
Private funds often rely on a 60-90 day credit line from banks to finance deals before calling on limited partners’ capital. This temporary loan is repaid once the partners’ contributions are collected. However, during financial crises like bank runs, access to these loans may halt, underlining the importance for limited partners to respond swiftly and adequately to capital calls.
Strategizing for Capital Call Management
To improve my management of capital calls, I’ve implemented several measures:
- Utilizing a Spreadsheet: I now keep a detailed record of investment dates, fund names, commitments, and expected call amounts.
- Realistic Financial Planning: I acknowledge the delay between committing capital and the actual calls, planning my income and cash flow accordingly.
- Diligent Capital Allocation: I adhere to a strict guideline on the portion of my net worth invested in private funds.
- Active Fund Engagement: I make it a point to attend quarterly fund updates and engage with general partners to gain deeper insights.
The Motivation from Financial Constraints
Facing financial constraints can be a powerful motivator. It’s crucial to stay driven to expand wealth and avoid complacency. By aggressively investing and considering investments as fixed expenses, we can continue to enhance our wealth while staying true to our financial goals.
