Quick Take: Capital calls are a critical part of private market investments. In a capital call, a fund manager requests a portion of the money investors have committed, typically timed to align with investment opportunities to avoid idle funds and maximize returns. The Strategic Credit Fund times these calls to minimize cash drag, optimize fund performance and ensure compliance with financial regulations.
With any fund capital call, such as the April 2025 call made by Origin Credit Advisers’ Strategic Credit Fund, the investor relations team receives inquiries about the factors impacting timing. It’s important to understand what a capital call is, why it matters to investors, and how it fits into the Strategic Credit Fund’s objectives.
What is a Capital Call?
In private market investments, a capital call is a request—or a series of requests—made by a fund or project sponsor or manager to investors to provide committed capital. These are contributions investors are obligated to make based on their agreed-upon commitment to the fund. The sponsor issues the call when they’re ready to deploy funds to, for instance, purchase bonds or fund construction loan draws. To maintain their stake and position in the funding queue, investors must fulfill their commitment within the time frame outlined in the investment agreement.
Why is Capital Call Timing Important for Investors?
For investors, the timing of a capital call matters because they need to ensure they have the liquidity to fulfill their capital commitments at the right time. If an investor knows their capital won’t be called for a few months, they might choose to invest it in a short-term asset like a Treasury bill or equities.
Calling all capital upfront, however, could leave funds idle, potentially hampering returns. Capital calls are typically spread over an extended period. To avoid this “cash drag,” managers aim to call capital close to the time when they expect to deploy it, ensuring funds are utilized efficiently and returns are maximized.
The timing of capital calls can vary, with many closed-end funds making multiple calls over several years. The first capital call typically marks the start of the investment period for closed-end funds and marks the commencement of the investor’s ownership interest in the fund.
How Cash Drag Works in a Fund
The charts below detail the impact of capital call timing and rates of return generated during a year-long investment period. What happens to an investor’s $1 million investment when they invest in a fund with and without cash drag?
In the first scenario, a $100 million fund has invested capital of $90 million, earning 10% IRR, and $10 million of cash on hand, earning a 4% interest rate.
The chart above shows the impact of cash drag on the fund and for the investor. In the second scenario below, however, when there’s zero cash drag on the fund, the investor has made an incremental $6,000.
How is Capital Called for the Strategic Credit Fund?
For Strategic Credit Fund investors, the timing and structure of a capital call depends on whether or not the investor uses retirement funds. Non-taxable investments, such as IRAs or 401(k) accounts, are generally called in a single tranche several months after the investor makes their initial commitment. The Fund’s governance documents preclude ERISA plan investments from exceeding 25% of the Fund.
Taxable dollars follow a different schedule and typically have a shorter capital call queue. If an investor is employing taxable investments, the Fund calls 10% of the capital upfront, with the remainder called in a second tranche after a few months. This limits cash drag and could elevate absolute returns.
What Determines the Timing of a Capital Call?
Several factors impact the timing of a capital call for fund managers.
Repo/credit line availability: A repo line, or repurchase agreement line, is a short-term credit facility allowing debt funds to obtain leverage by selling securities with the agreement to repurchase them later. This provides liquidity at a lower cost than equity capital, which in turn reduces the fund’s weighted average cost of capital, or WACC. The fund may draw on its repo line before issuing a capital call to minimize cash drag. Generally, the Strategic Credit Fund maintains conservative repo leverage of 20% to 30%.
Underlying investment payoffs: The timing of investment payoffs, such as early sales or refinancings from underlying investments, can affect the need for capital. If the fund receives additional cash from a payoff, it can reduce the amount of an upcoming capital call. For example, if a bond property sells early, providing an additional $2 million, the fund might reduce the next capital call by that amount and delay the call for those commitments at the end of the queue.
Fund operations: Fund managers may decide the timing of a capital call based on expected deal closings, funding obligations or investment opportunities.
Compliance: Finally, and most importantly, compliance with federal tax and ERISA regulations plays a key role. The Strategic Credit Fund must ensure that it stays within the limits for ERISA fund participation, which can impact capital flow and fund operations, and adheres to all regulatory requirements.
Next Steps
Are you interested in learning more about the Strategic Credit Fund or in receiving subscription documents? Feel free to contact us at investorrelations@origincreditadvisers.com.