An Inconvenient Call: Capital Calls During a Crisis

A public-market downturn coinciding with large private-market capital calls could force asset owners to liquidate assets at the worst possible time. Fortunately, capital calls tend to be highly correlated with distributions, which are typically depressed in downturns, dampening the liquidity requirements of mature private-capital portfolios. Unfortunately, at the onset of severe market shocks that correlation can break down, as illustrated by the spike in capital calls in March 2020.

At the outset of the COVID-19 crisis globally, capital calls across several asset classes doubled — and even quintupled in the case of distressed debt — relative to the preceding months. Reasons for the dramatic increase in contributions varied by asset class.

Nervous lenders and distress

Senior-debt funds, for example, often used subscription lines of credit, and many funds employed significant leverage.¹ Nervous lenders (particularly since there was a coincident spike in leveraged-loan spreads) pressured funds to deleverage by aggressively calling capital from limited partners (LPs).

Meanwhile, distressed-debt funds (in aggregate) called down an unprecedented 20% of uncalled capital in the 30 days starting March 16, 2020, scooping up quality assets trading at distressed prices.

Buyout funds similarly paid down sub-line balances but also propped up some of their portfolio companies — often themselves significantly levered — with a burst of capital calls. For real estate and infrastructure, there was an uptick in calls though the effect was more muted.

In the current environment, LPs need to be aware of the threat of sudden, albeit brief, calls on their capital.