I recently found myself in a financial pickle due to poor management of my private investment capital calls. I thought I’d share some simple solutions to ensure you always have liquidity. If you’re a newbie private fund investor or planning to diversify your investments with more private funds, take a leaf out of my book to avoid making the same mistakes. You’ll not only learn how to manage your capital calls better but also understand how private funds reinvest capital.
With the private investing market slowing down after the Fed hiked rates 11 times since Q1 2022, capital calls from various private funds have increased. A capital call is when a private fund asks for a portion of the capital you’ve committed to investing in their fund. For example, a 10% capital call of $100,000 committed equals $10,000. Usually, within three years, all your committed capital will be called by the private fund as it takes time to find new investments.
I’ve been an aggressive investor since 1999, and I rarely have more than three-to-six months’ worth of living expenses in my checking account. Most of my income gets invested into an S&P 500 ETF and private real estate funds. However, after Treasury bond yields surpassed 5%, I decided to invest my remaining cash into Treasuries, which left my checking account balance at less than one month’s worth of living expenses.
My investment strategy was going well until I received a capital call for $20,000. The venture capital fund hadn’t made a capital call in six months, and I had to scramble to come up with the funds. To meet this unexpected capital call, I transferred money from our joint checking account, which my wife and I primarily use for our Lake Tahoe property vacation rental.
After paying off the vacation property mortgage early, the joint checking account started growing by $3,500 a month. The combined money from my account and our joint checking account was enough to cover the $20,000 capital call. However, I received another surprise capital call from a different private fund, and this time, it was for $61,351 from my fourth venture debt fund investment.
I didn’t have enough to fund the $61,351 capital call from my checking account, and I had five weeks until the money was due. I had to get creative to come up with the funds. I analyzed all my financial accounts to see which had extra cash sitting idle, went through all my Treasury bond holdings to see which 3-month T-bills were set to expire within four weeks, and increased my active income by doing more consulting, coaching, and business development.
The next five weeks were quite exciting as I tried to come up with the funds. This situation also made me realize how much idle cash a household might actually have that isn’t being optimized.
Having invested in private funds since 2005, I’ve been late meeting capital calls before, but I’ve never been penalized. Generally, if you’re having a hard time meeting your private fund capital calls, you will likely get a 30-day grace period to meet your obligations after the deadline before problems may arise.
From the private fund’s perspective, under normal operations, a private fund will have a 60-90-day line of credit with a bank to fund deals. Once the line of credit is drawn to make an investment, the private fund then makes a capital call to its limited partners with a four-to-six-week deadline. Once all the limited partner’s funds are received, the private fund then pays back the line of credit to its bank.
To better manage my capital calls, I’ve started organizing everything in a spreadsheet, being realistic about my future income and cash flow, being stringent with my capital allocation percentages, and listening in on the quarterly updates and getting to know a general partner.
I have a “go broke to win big” philosophy. The philosophy states that as long as you feel broke, you will do everything you can to not feel broke anymore. The best way to feel broke is to invest as much of our cash as possible. By treating our investments like expenses, we will grow rich. And once we grow rich, the trick is to keep that hunger alive!
