Capital Activities
Capital contributions to the fund are the first concern. How capital comes into the fund and how it is tracked will be important for distributions, capital calls and audit purposes. If there are multiple share classes, general partners and limited partners, multiple dividend rates or legacy investors assigned into the fund, all this needs to be coded and tracked at the outset for accurate payments and financial reporting. Does historical activity need to be maintained to account for break points and thresholds? Will investors receive warrants and how will they need to be tracked? Will in-kind contributions be accepted? If so, how will any excess value be allocated? Will the investor be treated differently in any way? Will the general partner be allocating carried interest into the fund? Might the manager be paid in equity rather than cash for consulting fees, management fees, or other services? Are there different distribution terms for different categories of investors, perhaps all the investors with a given custodian? Are there side letters? What provisions are in place in the event of deaths, divorces and other upheavals among investors going forward? Of course, all these considerations must be allowed by the operating agreement or LPA, which should provide terms for handling each. Implementing them operationally will go smoothly only if they are contemplated and appropriately encoded during set up.
Capital Calls
There are a number of important decisions with regard to capital calls that need to be made at the outset as well. First, the content of the capital call itself. It is worth considering in advance how much and of what kind of information to include in your capital calls to avoid confusion and unnecessary questions. How detailed do you want capital calls to be? How much detail is too much? Will they include banking information, and contact information? Will the investor’s pro-rata share of the fund be referenced? Will your capital call reference what investment the specific tranche of called capital is for? A capital call can be as detailed as you want. But there is such a thing as too much information.
The tracking you deploy when setting up the fund will be important in preparing your capital calls. Are there parameters for investors who have contributed a certain amount? Are there cash limits? ERISA investors may be subject to percentage limits, opt outs, and prohibitions on derivatives, credit default swaps and commingled funds. They will be unable to participate in some investments and, with proper tracking, will be automatically omitted from the capital call. Institutional funds may have percentage limits and exclusions that disqualify them from a given capital call. The more any of these special provisions are understood and encoded during set up, the more effortlessly capital calls can be produced.
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