What Are Capital Calls and How Do They Work?

Capital calls facilities are a financing mechanism used by investment funds, backed by committed capital from their investors, to make investments or meet fund-related needs. This system allows fund managers to optimize liquidity management and achieve greater efficiency in capital utilization, enabling more agility in executing investments.

Capital call financing is a type of funding that private investment funds—such as private credit, private equity, or real estate funds—can secure against the capital commitments made by their investors (commonly referred to as Limited Partners, or LPs). This financing is made available when the fund requires liquidity for a specific investment or to cover operational expenses without immediately calling on the capital commitments from its LPs.

The process begins with investors pledging a specific amount of capital to the fund. The fund manager can then arrange financing secured by these capital commitments, providing quick access to funds when an investment opportunity arises or when liquidity is needed for general expenses. The financing is subsequently repaid when the fund collects the committed capital from its LPs via a “capital call”, which means the transfer of money from the investors to the fund.

Advantages of Capital Call Facilities

Capital calls facilities offer both efficiency and flexibility for investors and fund managers. For investors, one of the key benefits is administrative flexibility—they do not need to move capital each time the fund faces a liquidity need during its investment period. The fund can instead wait until multiple investments have been made before combining the amounts and requesting a single total transfer from the LPs. As Gonzalo Fernández-Turégano, Global Sector Head of Financial Sponsors at BBVA CIB, points out: “The flexibility provided by capital calls allows for more dynamic fund management and greater agility in executing investments.”

For fund managers, this mechanism simplifies cash flow management by enabling capital to be called only when required. It minimizes idle capital, shortens the so-called J-curve, and improves the fund’s IRR (Internal Rate of Return). According to Jorge González Jacob, Head of Corporate Lending at BBVA CIB, “The key to this mechanism lies in its efficiency. Capital call facilities allow fund managers to pursue investments during the investment phase without needing to issue repeated capital calls to LPs or have large amounts of idle cash on the balance sheet.”

The Role of Investment Banks in Capital Call Facilities

Investment banks, such as BBVA, play a crucial role in managing financing secured by capital call facilities by providing advisory and financing services. The key areas where investment banks support funds include:

• Structuring Financing: Helping optimize capital usage through well-structured financing solutions.
• Bridge Financing: Since private equity funds may not have immediate access to committed capital, investment banks provide bridge credit lines to facilitate investments while awaiting LPs to fulfill capital calls.
• Credit Risk and Financial Analysis: Assessing the creditworthiness and commitment levels of LPs is critical to evaluating their response to capital calls and the fund’s ability to repay the financing.
• Relationship with the Fund: Capital call facilities act as a relationship tool for financing banks, demonstrating their support to financial sponsors alongside other value-added services such as M&A advisory, acquisition financing, structured asset financing, and transactional banking products.

Yomi Akinyemi, Executive Director of Fund Finance at BBVA in New York, highlights the strategic value of these services: “Investment banks play a pivotal role in structuring financing solutions, providing bridge credit lines, and assessing the creditworthiness of LPs to ensure the fund's liquidity needs are met efficiently.”

This comprehensive support demonstrates how capital call facilities act as a relationship tool for financing banks, showcasing their commitment to financial sponsors. BBVA CIB is dedicated to delivering high-value services and solutions to facilitate capital call financing.