[merinocristina]

Hi, i need some help for the accounting entry of booking a capital call on investment.
thanks

 

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[waffle_house]

What is a capital call?

[Anonymous]

I only know of capital calls in context of private equity…In real life the entry would be against Capital Call: Investments CR and Receivable: Capital Call DR….

[So FAR So Good]

If you're talking in the context of private equity/commitment based funds, there are a couple of different approaches. First, are you using an existing line of credit to fund the investment and then calling capital later? Or are you calling capital in advance of the purchase?

Scenario 1) – Calling Capital in advance of purchase in order to facilitate purchase – Most companies will send letters outlining a due date for the capital call. This is the date the actual contribution entry will be effective. Any payments made before this date will be considered a liability (Contributions Received in Advance), and any not received on the date the Call is due will be booked as a receivable from investors (Contributions Receivable).

Regardless whether people pay early or late, this is the entry ON THE DAY THE CALL IS DUE (let's assume 1/1/17 for all entries):

1/1/2017
Dr) Cash……………..$100
Cr) Contributions……..$100

1/1/2017
Dr) Investments……….$100
Cr) Cash……………..$100

If people pay early, this is booked on the day the pay their portion, followed by the subsequent reversal on the day the call is due (along with the payment made by the remaining people):

12/30/2016
Dr) Cash……………………………….$10
Cr) Contributions received in advance…….$10

1/1/2017
Dr) Contributions received in advance……..$10
Dr) Cash……………………………….$90
Cr) Capital Call……………………….$100

If people pay late (full contribution is booked, but receivable outstanding):

1/1/2017
Dr) Cash………………………………$90
Dr) Contributions Receivable…………….$10
Cr) Contributions……………………..$100

1/3/2017
Dr) Cash……………………………..$10
Cr) Contributions Receivable…………..$10

I'll post scenario 2 later with utilization of a credit facility, but this should do for now.

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[Anonymous]

So interesting, because in real life we aren't allowed to book calls before they are due… In other words, while we can have distributions payable, we cannot have capital call receivable on the books-they aren't recognized until they are actually paid in cash…. Just from a real life experience-fund accounting here for the last 15 years:)

[So FAR So Good]

Agreed, but you're not booking calls before they're due in any of those examples (Call due 1/1 and all Calls booked as contributions on 1/1 only, regardless of when paid). Also, none of the examples above show a receivable being booked prior to the Call due date.

The only item above that is booked before the Call due date is a liability if any of the partners pay in advance. You can't control when the partners pay those calls and since you're not adjusting their basis for a contribution until the due date when you will apply it, you have a liability to them titled “Contribution paid in Advance,” although that name can be slightly misleading as there is no actual contribution booked yet (you haven't given them anything until 1/1). Their commitment is also only reduced on the date the capital call is executed as a contribution. If the fund doesn't end up using that capital call, most funds will have a provision to return the cash within a certain amount of days per the LPA as a return of capital to partners as opposed to a distro.

Realizing now that the second example may not have been clear – further noted below:

12/30/2016
Dr) Cash……………………………….$10
Cr) Contributions received in advance…….$10 (note, this is NOT a “contribution” – it is a liability to the partners that paid in advance)

1/1/2017
Dr) Contributions received in advance……..$10 (reversal of the liability to book as official contribution on cap call due date)
Dr) Cash……………………………….$90
Cr) Capital Contributions……………………….$100 (this is where the capital call gets captured for all partners, including those who prepaid)

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[So FAR So Good]

Scenario 2 – Fund uses a credit facility as a way of borrowing for investments and calling capital from partners later on. There are many benefits to this from an investment manager's perspective, including more flexibility when it comes to cash management (for example, credit is readily available for same-day withdrawal rather than having to anticipate out a certain number of days for the capital call to be paid for by partners), and it allows managers to time their capital calls in a way that's more beneficial from an investor's IRR perspective (the later you call capital, the less time it appears it was put to work which equals higher IRR if investments appreciate – in the PE world, return metrics are EVERYTHING). Additionally, investors like having the flexibility of the credit facility as it means they will likely go longer periods of time without having to contribute to the fund, allowing them opportunity to deploy that cash elsewhere in the meantime. Also, if you have a manager who is smart about using realizations to pay down the credit facility, that means the manager eventually makes “Net” capital calls. For example – Fund A owes $100 for investment borrowings, but paid back $50 from cash it received on an investment realization. It will now call a gross capital call of $100 and make a gross distribution of $50 to its investors, BUT, it will only require net $50 paid from investors. During the investment period, this means investors are deploying less cash than their commitment (obviously with the knowledge that it's due to investment liquidity).

Same entries as above apply across the board, with the exception being that the investment was probably made sometime in the past.

10/1/2016
Dr) Cash……….$100
Cr) Loan Payable……$100
10/1/2016
Dr) Investments…$100
Cr) Cash……….$100

Then you call capital on the same 1/1 date:

1/1/2017
Dr) Cash……………..$100
Cr) Contributions……..$100

1/1/2017
Dr) Loan Payable……….$100
Cr) Cash……………..$100

Everything else remains the same regarding the Capital Call scenario. Hope this helps.

F - 91 (6/5/2016)
A - 7/30/2016
R - 10/8/2016
B - 12/10/2016

[Anonymous]

Sorry, I misspoke-they would be recorded if paid early, but if they are paid late, you wouldn't have a receivable is what I meant to say:)

[Author]

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