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Minimum Viable Capital Call

Happy Thursday! 👋

I received a call a few days ago from an LP who wanted to hire me to advise him on a capital call decision.

Shortly thereafter, he mentioned that the GP has not provided any financials to date and he only has occupancy numbers.

I proceeded to tell him that I don't think I can help and it doesn't make sense to hire me either - it's impossible to evaluate a capital call without a basic foundation, and the GP not willing to provide basic information is likely in and of itself a directional answer.

It's impossible to evaluate a capital call without a basic foundation

 

But what is that foundation?

What I set out to do today is explain what the minimum components should be of such a capital call communication, without which it is somewhere between difficult to impossible to make a logical investment decision. 

Reasons to read this:

• GPs: to ensure that you're providing enough information to LPs to make a decision

• LPs: this article will provide you with a checklist of necessary information in order to make a decision on a capital call

First, note that this article is a continuation of the “Minimum Viable” series, which I’ve received a lot of feedback on and hope you’ll enjoy:

• Minimum Viable Deck

• Minimum Viable Reporting Package

Second, while we’re on the topic of capital calls, I want to mention other articles on capital calls that are relevant:

• 6 steps to a successful capital call

• Do sunk costs matter in capital calls?

Now let’s move on to our topic of the day.

What minimum information does an LP need to make a decision?

• **Full capital stack **with any material changes since the acquisition

• Ideally this comes along with a balance sheet to make sure that you understand the order of payoffs at exit (sale) and liabilities outstanding.

• It is unfortunately somewhat common for a GP to take out loans from a third party or related parties and not mention that to the LP.. you don’t want to find out about those when you’ve already wired additional capital!

• In some cases there’s a substantial amount of accounts payable that’s past due as well

• Important to note any maturities here - I’ve seen “band aid” capital calls where LPs were asked for cash while the GP knew that within 6 months there will be another cash need as a result of cash in refinance or rate cap expiration

• Sources and uses

• Assuming the capital call is filled, where is the cash going (uses)?

• Are the any other sources (cash sources) other than additional capital from LPs? 

• Financials for at least 12 months preceding the capital call, this should obviously go all the way to NOI so you can see changes

• Projections to exit with explanations on any material changes performance. It should be clear that this capital call will carry the project through completion/exit with some room for error.

• Valuation of the property today and at exit - this can be a range based on cap rates and NOI, but the assumptions need to be clearly outlined by the GP

• What happens if LPs doesn’t invest - this is super basic, but I don’t always find these details in GP communications … are there penalties via subordination or dilution?

For extra credit (not minimum viable in my opinion):

• How would investor returns at exit change if two variables become less favorable than projected? Typically this is the NOI and cap rate at exit

• Is the GP contributing to the capital call themselves? If not, it’s probably a good idea to remind the LP base how much you have invested to date.

• If any sort of debt payoff or debt agreement negotiations were involved, what were the changes to the terms?

While investment decisions always have a degree of uncertainty, there's a big difference between uncertainty of the future and uncertainty about the facts today.

In other words, there will always be unknowns about the future.. but that doesn’t mean you should be expected to make a decision without understand the situation on the ground today!

I hope this was helpful! As always, would love to hear any questions or comments and wishing you a wonderful day.

I advise LPs on existing and potential positions and write articles here weekly on what I see in the marketplace that could help you invest better. You can find me on LinkedIn or Twitter.

Whether you’re an LP, want to learn to become one, or affiliated with LPs (GPs, Attorneys, CPAs, Financial Advisors) I hope you’ll consider subscribing and sharing this post to help others make more informed investment decisions.

When you’re ready, I could help you in 3 ways - simply reply to this email if one is of interest:

• Limited Partners:

• Potential positions - you’re considering investing and need an independent opinion

• Existing positions - there’s a lack of communication, you’re concerned about fraud, or perhaps you got a capital call request and you’re not sure how to proceed. I have also helped LPs with a “post-mortem” analysis on deals that didn’t work out - it’s important to learn these lessons as opposed to just blaming the GP.

• LP Course - review 4 separate memos in 4 weeks together with me and other LPs to learn how to find good LP investments.

• LP Topics Seminar** - **an ongoing biweekly 1 hour meeting with other LPs where we'll go over investment decks, capital calls, distressed situations, and modeling. This is meant to provide a deeper look into existing LP investments. Please reply to this email if you’re interested.

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• General Partners:

• Deck review - I’ll look over your marketing materials from the perspective of an LP and provide slide by slide commentary to improve your pitch

• Investment review - I’ll provide independent feedback on an opportunity you’re pursuing

• Capital call advisory** - **you suspect that you’ll need to make a capital call, but aren’t sure how to proceed or communicate the message.

• Other - anything from waterfall/fee advisory to disagreements between co-GPs on the proper path given a set of circumstances

• General Consulting: modeling, strategic advisory, underwriting training, etc.

If you’d like to speak on the phone, you can reach me at aleksey@hey.com.