What New Fund Managers Should Know About Capital Calls and Distributions
Managing a fund is not just about sourcing deals and driving returns—it also requires a solid grasp of the mechanics behind capital calls and distributions. These two processes are essential to the operational success of any venture capital or private equity fund. For first-time fund managers, understanding how and when to call capital or make distributions can improve transparency, investor trust, and overall fund efficiency.
This article breaks down the key legal and operational insights new fund managers need to know.
1. What Is a Capital Call?
A capital call (also known as a drawdown) is the process by which a General Partner (GP) requests a portion of committed capital from Limited Partners (LPs). This is done as needed—typically to fund an investment, cover management fees, or pay fund expenses.
Capital calls must align with the terms set out in the Limited Partnership Agreement (LPA), including notice periods, timing, and allowable uses.
2. Structure of a Capital Call Notice
A capital call notice should clearly communicate:
The amount being called from each LP
The purpose of the capital call (e.g., investment, fees)
The payment instructions and deadline
Any consequences for failure to fund (default provisions)
Consistency, clarity, and professionalism are key to building LP confidence.
3. Timing Is Everything
Capital calls are often made on a deal-by-deal basis in private equity and on a more flexible basis in venture capital. Timely calls help ensure you can act quickly on investment opportunities without keeping excessive idle cash in the fund—something LPs generally prefer to avoid.
4. What Are Distributions?
Distributions are payments made by the fund back to the LPs, typically from realized gains or proceeds from exits. Distributions can be:
Cash Distributions: When proceeds from a sale are returned to LPs
In-Kind Distributions: Where assets (e.g., shares in a portfolio company) are distributed instead of cash
5. Distribution Waterfalls
Funds follow specific "waterfall" models that define the order in which distributions are made. Most follow this general order:
Return of capital to LPs
Preferred return (if applicable)
GP catch-up
Carried interest to GP (typically 20% of remaining profits)
New managers must understand and clearly communicate these mechanics.
6. Clawbacks and Holdbacks
Some LPAs include clawback provisions that require GPs to return a portion of their carried interest if the fund later underperforms. Similarly, holdbacks may delay part of a distribution to cover future liabilities. These legal features help maintain fairness over the fund’s lifecycle.
7. Tax Considerations
Distributions may have tax consequences depending on the fund’s structure and jurisdiction. Managers should work with tax advisors to ensure proper reporting and optimize post-tax returns for LPs.
8. Legal and Compliance Requirements
Fund managers must comply with securities laws, fund documentation, and fiduciary duties when calling capital or making distributions. This includes maintaining accurate records and ensuring consistency with the LPA and side letters.
9. Communicating with LPs
Transparency builds trust. Timely reporting, clear notices, and regular updates on the use of capital and status of distributions can differentiate a professional GP from an amateur one.
10. Build Your Back-Office Muscle
Efficient execution of capital calls and distributions requires strong fund administration. Whether in-house or outsourced, your ops team must be well-versed in cash management, legal compliance, and investor communications.
Mastering the Mechanics
Capital calls and distributions are more than administrative tasks—they’re key pillars of fund operations and investor relations. For new fund managers, understanding these processes from a legal and practical standpoint can build credibility and ensure long-term success.
Need expert legal support for fund structuring and investor communications? Contact our Miami-based team at 786.461.1617. We specialize in helping emerging fund managers navigate the complex legal terrain of private capital.