Recently, I faced financial difficulties due to poor management of my private investment capital calls. To help you avoid the same pitfalls, here’s some advice on maintaining liquidity, especially if you’re venturing into private funds.
A capital call occurs when a private fund requests a portion of the committed capital, typically to invest in new opportunities. For example, a 10% capital call on a $100,000 commitment means you need to provide $10,000. Unlike margin calls from brokerages that demand funds to maintain stock positions, capital calls are planned but can still catch investors off guard.
How I Went Broke
I’m an aggressive investor and usually don’t keep more than three to six months’ worth of expenses in my checking account. I invest most of my income into an S&P 500 ETF and other assets. However, after switching my remaining cash to Treasuries, my checking balance was dangerously low. When a surprise $20,000 capital call came, I had to scramble, transferring money from our joint account used mainly for managing rental property income.
Dealing with Multiple Capital Calls
Just as I managed one capital call, another hit—this time for $61,351 from a venture debt fund. I’ve supported this fund since my business school friend started it about eight years ago. With a major investor base now institutional, I felt smaller by comparison but still committed. Lacking funds in my checking account to cover this larger call, I had to consider various options—none of which included asking friends for money or hastily returning to a conventional job.
How I Managed the Funds
I ended up pooling resources from several areas:
– I consolidated cash from over 30 financial accounts.
– I checked for upcoming Treasury bond maturities.
– A check from my mother, initially not deposited, was added to our funds.
– I paused all investing and minimized expenses, ramping up consulting and coaching gigs to increase income.
A Closer Look at Capital Calls
From the private fund’s perspective, capital calls are crucial. Funds often use short-term bank loans to make timely investments, which they later cover by calling committed capital from investors like me. This can make or break a fund’s ability to seize investment opportunities.
Managing Capital Calls Better
To avoid future liquidity crises, here’s my strategy:
1. Organize a detailed spreadsheet for all private investments, tracking everything from dates and fund names to expected capital call amounts.
2. Assess and plan for future cash flow realistically, acknowledging that commitments don’t always mean immediate cash outlays but can be staggered over years.
3. Stick to a strict asset allocation strategy, ensuring that speculative investments like private funds don’t exceed a prudent percentage of your net worth.
Embrace the Challenge
Being stretched financially thin isn’t comfortable but it’s enlightening. It forces you to assess and utilize every financial resource and opportunity more effectively. It also brings a heightened awareness of your financial resilience and creativity in managing money.
Lastly, always honor your commitments. Failing to meet capital calls not only strains your relationship with fund managers but also jeopardizes your future investment opportunities.
By following these insights and strategies, you can navigate the complex world of private investing without compromising your financial security.
