Bridger Pennington walks through how capital calls work in investment funds, using concrete examples like a $100M fund and a $5M deal. He covers timing, penalties for missed commitments in the LPA, and managing the risk of failed closings, while documenting his own fund's immediate needs: $40K-$200K this weekend and $500K-$1M over six weeks.
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Welcome back to Investment Fund Secrets. I'm Bridger Pennington, and today I want to talk about how to execute a capital call effectively for your fund. All right, so this week has been a little crazy. Tonight is late. I don't know if you can tell, like, the eye— my eyes are bloodshot right now as I'm recording this. It's been a long day. We're trying to get ready for this weekend. We have a big deal coming through, a new clientele, I guess you could call them, of people that we're issuing loans to and doing debt financing for. We're gonna start doing a lot more of these, so we're trying to get our contracts in place. We'll probably move, I don't know, $500,000 to $1 million in the next 6 weeks into these types of loans. So I'm trying to right now, this isn't— and I treat this podcast a little bit as my journal of like how we're moving and trying to get things set up. And so something interesting I've been trying to deal with right now is with capital calls. And I want to talk to you today about that, about what a capital call is, how to execute that correctly, and what to do. So for those who don't know, a capital call in a typical fund, what you'll do, let's say you have a $100 million real estate fund, a capital call will be You have a hundred million dollar fund, but usually you don't have that just sitting in your bank account. What you'll do is you'll talk to investors and you'll say, "Hey, Mrs. Investor," and she wants to put in ten million dollars. You say, "Great. You have now committed ten million dollars that we can call upon anytime we want to use." So if you have a deal coming around the corner and it's—we'll just use round numbers—it's a five million dollar deal, right? And she has ten million dollars committed of your hundred million dollar fund or ten percent. She has ten percent pro rata. of your fund. So, on a $5 million deal, you would call her up, hi, Mrs. Investor, send her email and say, hey, we need— we're going to call 10% of the fund right now to start doing deals. So, from her, you would call $500 grand and then you've got 20 other investors and you would call 10% of their capital commitments into your fund. That's called a capital call and your investor is by contract able to meet their capital call. You do this on purpose to First off, so you're not liable for their money. It's way safer to have the money in their bank accounts, right? Because day one, you're not gonna be able to deploy $100 million into real estate projects, right? It's gonna take a little bit of time. Then secondly is you don't have to— for your— we talked about this before about paying a pref and paying other things. You don't have to do that when on the full $100 million. You can do that just on the capital called. So if you call down, let's say it's $5 million, that $5 million, if you only use $5 million for the year, You actually do your IRR on just $5 million on the capital called. You wouldn't do it on $100 million. So you'd say, hey, we had $5 million this year and we turned it into $7 million. We had a great return this year, blah blah blah. But if it was $100 million and we turned that into $102 million, your IRR would go way down. With a capital call though, a few things probably always go wrong for a lot of funds is your investors miss their capital commitments, right? So, hi Mrs. Investor, can you— we need to put you— You know, $500 grand and we need it by this Friday and we're gonna close on the property next Tuesday. And people have their money tied up other places, they got to move it around, and sometimes your investors are gonna miss capital calls. So in your LPA, your PPM, make sure to write in penalties for doing so. So say, hey, if you miss a capital call, it's gonna be a 2% penalty for doing so. And if you fail to meet that capital call within 20 days after, it's gonna be another 2%, and so on. You can add all these terms and say, you know, at that point we're gonna kick you out of the fund. At a, you know, 4%, 6% penalty, and we get to keep that money. So there's all these different things you can do if they, if they don't do it, because it is so crucial for you to get your money on time. For that example, if it's a Friday and you're closing on Tuesday, if she isn't sending her $500 grand and you can't close on a deal and you miss a deal because your investor didn't put in $500 grand, but she promised she would, that is a huge deal for your fund, right? You missed it. All your other investors are mad at you now. Because you missed a deal and it wasn't even your fault, right? So it's good to time your capital commitments right. So anyways, with that example in mind, this week I'm trying to plan out this weekend. We're probably going to need 40 grand. It could be 200 grand this weekend. I don't really know. I've got to call my investors and figure out how much money we need for this weekend because I don't want to be sitting on extra capital for the next couple weeks. And this is a brand new deal to us. So right now I've been debating what to do. How am I going to call my investors and what am I How much money do I want to pull? I'm— they're happy to give me money. I just don't know how much I want to pull from the fund because I don't want to be sitting on $200 grand when I only use $20 grand of it, and vice versa. I don't want to have $200 grand of loans to do and I only have $20 grand in the bank account. So right now I've been running the numbers and trying to figure out exactly what's best. But when you're running your fund, that's something to always think about in mind is staying ahead of deal closings, especially for real estate, right? You've usually got a hard close date. You need the money by X date. Be aware of your investors, your LPA, saying, hey, when I do a capital call, you've got 7 days or 4 days to complete that. And if you don't, you know, I don't care, you could be busy, you could be in the Bahamas, you could be somewhere, I don't care where you're at. If you don't complete that, there's gonna be a penalty because it's so crucial for you to complete deals and not miss deals for your fund, and it's not fair to the other investors. So that is what a capital call is, capital commitments, and how you should deal with your investor. That's something I'm dealing with right now. Probably next week I'll give you an update on how this weekend goes, but I've talked to a few investors. We just doubled our fund size last week from our investors, and we've deployed all that money already. So I'm gonna have to probably— we're gonna have to add a lot more money these next couple weeks and just keep growing and growing and growing. And still small potatoes. I haven't hit that $100 million fund size yet, but we are growing like crazy, and I want to document the whole journey with you on this podcast and this show because I want you to see how it is from the ground up and see the problems that you'll face in the beginning because it's hard when you see people on the top of the mountain and they're like, oh, it was so great getting here. It was so beautiful and it's so pretty on top. But you don't see the mud and the blood and the tears of how they struggled for years through these— navigating these little things to get to the top. And I want to take you through that. That's today's episode. See you guys in the next one. Bye.
