Capital calls: how and when do you invest in a private capital fund

When deciding to invest in a private capital fund, you must first establish the total amount you want to invest, that is, your investment commitment with the fund.

This amount represents all the money you will invest in the fund over time; therefore, you will not have to disburse it in full when you enter the fund. You will gradually contribute to it through the capital calls.

Imagine that you commit €10,000 to the Crescenta Private Equity Buyouts Top Performers I portfolio. Through a first capital call, we will request from you 25% of the committed capital to initiate your investment. The rest of the committed amount you will gradually contribute to it during the first years of the fund's life cycle.

Funds make capital calls as they find investment opportunities, so it is difficult to establish a clear frequency of when you will have to disburse part of your commitment. Capital calls are usually made during the fund's first five years; afterwards, and until the end of the fund's life cycle (approximately 10 years), the investor will begin to receive distributions (the invested capital plus the generated earnings).

In a conventional scenario, this could be an example of managing your capital:

Year 1: you make an investment commitment of €100,000 and receive the first capital call for 25% of the total committed amount. In other words, at the time of subscription you will have to invest €25,000.

As it is the first year, the fund sometimes can make an additional capital call, which will depend on the investment opportunities found by the funds.

Years 2, 3, 4 and 5: over the next few years, you will be asked to disburse around 20%-25% of the committed capital every year (approximately €25,000 a year).

After the capital's complete disbursement, that is, the invested €100,000, the fund will start to make distributions and gradually return the invested capital plus the earnings before the end of the fund's life cycle.

We must take into account that this scenario is an example and may not coincide with the capital flows finally experienced by Crescenta's portfolios.

Committed capital: this is the amount of money that the investor commits to investing in a private capital fund. Once the fund's subscription agreement has been signed, this capital cannot vary.

Disbursed capital: it is part of the committed capital invested in a private capital fund through capital calls. The disbursed capital does not always complete the committed capital; it could be that a smaller amount is required.

Distributed capital: these are the gains that the investor receives once the divestment or harvesting period begins in a private capital fund. The distributions are the sum of the capital contributed to the fund plus the gains.

When investing in a private capital fund, we first commit to investing a certain amount (committed capital). Of this total, the fund will usually ask for around 25% to cover initial expenses and, if they have already found an opportunity, to invest in it.

As it finds more opportunities, the fund will ask for more capital through capital calls (capital disbursed) to buy companies, seeking their revaluation.

Once they reach the target, the fund will sell the companies and return the earnings (distributions) to the investor.

This content is merely indicative. This content is merely financial training offered to you by Crescenta, without the intention of giving any type of personalised investment recommendation.

It is neither any type of advertising of financial instruments nor a recommendation or purchase offer.

Author

Sofía Cisneros

Communication and content - Crescenta