Capital Call

If a GP took all $1bn at the fund's first close, that cash would sit idle for years until deals are found — dragging down the fund's IRR, since IRR is time-sensitive and uninvested cash earns nothing. So GPs only call capital when they actually need it: a specific deal closes, a fee is due, or an expense arises. This keeps LPs' money working elsewhere until the last possible moment, which is also why PE funds report a J-curve — early years show negative returns from fees and slow deployment before investments mature.

When the GP identifies a use of capital, it issues a capital call notice — usually 10 days' notice — to each LP, stating the amount due (pro-rata to their commitment) and the due date. LPs must wire the funds by the deadline. Over the fund's ~5-year investment period, a series of these drawdowns gradually deploys the committed capital. The portion not yet called is called dry powder — committed but uncalled capital available for future deals. A $1bn fund might call capital in dozens of separate drawdowns over its life.

Funding a capital call is a legal obligation, not optional. If an LP fails to fund (a default), the LPA imposes severe penalties — forfeiture of a large portion of the LP's existing interest, forced sale at a discount, loss of future participation, or interest charges. These draconian terms exist because one defaulting LP can leave the GP unable to close a deal. In practice, defaults are rare among institutional LPs precisely because the penalties are so harsh, but the risk rises in market downturns when LPs face liquidity squeezes (the "denominator effect").

Many GPs now use a subscription credit line — a bank facility secured against LPs' uncalled commitments — to fund deals immediately and delay the actual capital call by months. This boosts the fund's reported IRR (because LP capital is outstanding for less time) without changing the underlying deals' MOIC. LPs and the ILPA scrutinize this practice because it can flatter IRR figures. Knowing that subscription lines exist and why they inflate IRR is an advanced point that signals real fund-mechanics knowledge in interviews.