A capital call (also known as a draw down or a capital commitment) is a legal right of an
investment firm
An investment company is a financial institution principally engaged in holding, managing and investing securities. These companies in the United States are regulated by the U.S. Securities and Exchange Commission and must be registered under t ...
or an
insurance firm
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
to demand a portion of the money promised to it by an investor. A capital call fund would be the money that had been committed to the fund. The capital call is the act of actually transferring the promised funds to the investment target. A capital call agreement defines capital call terms.
For example, when an investor buys into a
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
fund, that fund's managers may wait some time before using the investor's money to buy real estate, either because they are waiting for real estate prices to be favorable, or because they are researching new deals. When they are ready to buy real estate, the fund managers issue a capital call, requiring investors who have
committed money to the fund to transfer that money over.
The fund might also borrow funds instead of using the investor's money. This allows the fund to benefit from
leverage
Leverage or leveraged may refer to:
*Leverage (mechanics), mechanical advantage achieved by using a lever
* ''Leverage'' (album), a 2012 album by Lyriel
*Leverage (dance), a type of dance connection
*Leverage (finance), using given resources to ...
. The financing of the real estate purchase is realized through borrowing from banks. When the fund has reached a certain level of
return, capital calls are issued and the borrowing is paid off.
References
External links
Issuing a capital call — Notice — Insurer's duties — Rules.
Rights
Legal terminology
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