Tip:
Highlight text to annotate it
X
Welcome to our training on Draw Down Capital! This is a topic that is crucial to your understanding
of how and when an investor�s capital in a private equity fund is actually invested.
This video will help you to understand the basics of what drawn down capital is and when
it is used. A drawn down capital, also known as a capital
call, can be defined as the time when a venture capital firm has decided where it would like
to invest, and it approaches its investors in order to "draw down" the money. The drawn
down capital will already have been pledged to the fund but this is the actual act of
transferring the money so that it reaches the investment target.
private equity fund manager (usually a �general partner� in a partnership) will be the one
requesting that investors in the fund (�limited partners�) provide additional capital. Usually
a limited partner will agree to a maximum draw down capital amount and the general partner
will make a series of capital calls over time to the limited partner as opportunities arise
to finance startups and buyouts. A capital call (also known as a draw down or a capital
commitment) is a legal right of an investment firm or an insurance firm to demand a portion
of the money promised to it by an investor. When a Private Equity firm is ready to buy
an asset, they call on their investors to transfer a portion of the promised money committed
to a certain fund. The capital call (or draw-down) notice contains sensitive information such
as the dollar amount to be transferred into the fund, bank routing information, and the
investor�s name and address. For example, when an investor buys into a
real-estate fund, that fund's managers may wait some time before using the investor's
money to buy real estate, either because they are waiting for real estate prices to be favorable,
or because they are researching new deals. When they are ready to actually buy real estate,
the fund managers issue a capital call, requiring investors who have committed money to the
fund to actually transfer that money over. The fund might also borrow funds instead of
using the investor's money. This allows the fund to benefit from leverage. The financing
of the real estate purchase is realized through borrowing from banks. When the fund has reached
a certain level of return, capital calls are issued and the borrowing is paid off.
Capital commitment is when a private equity or private real estate fund�s managers seek
capital from a number of institutional and/or high net worth individual investors through
�capital commitments,� which can be a fairly large investment. A private equity
or private real estate fund is generally a closed-end fund, which means that, after one
or more fundraising stages (called �closings�), new investors are not accepted. A fund will
not launch if it does not receive a minimum level of capital commitments.
For the most part, private equity and private real estate funds are �needs-based� investments.
This means that partners of the fund will commit to giving the fund manager installments
of capital, up to a predetermined dollar amount, on an as-needed basis. As investment opportunities
are identified, the fund�s managers will send investors a formal notice to submit the
money they have committed to the program. This formal notice is referred to as a �capital
call� and is a contractual obligation that each partner must satisfy.
A private equity or private real estate fund�s offering documents typically provide a number
of potential actions against investors who fail to meet capital calls. For example, a
fund may require defaulting investors to forfeit entire ownership interest in the fund and
offer the other fund investors the ability to purchase the forfeited interest. One thing
to note is that private equity funds impose significant penalties on limited partners
who fail to reach their committed draw down capital amount and therefore, the status of
the capital commitment for each fund must be determined quickly.