Capital calls to pay off a GP loan

On the ethics and intricacies of a common capital call tactic

Welcome back and happy Monday!

I just posed the question below on Twitter and LinkedIn, but wanted to take a minute to give you my own perspective at length after seeing this dozens of times.

---

Announcements (article continued below):

1. March LP Cohort: Review 4 deals with me and a small group of other LPs to learn what to look out for in deals. Please reply to this email if it’s of interest.

2. LPs on GP-LP Match have now gotten 30 deals in ~3 weeks and the platform is at 985 verified LPs. If you’re an LP or GP join here in under a minute.

---

First, let’s set up the case that I’ve seen time and time again:

• Total equity at 2021 purchase: $20mm

• Capital call in 2025: $5mm (25% of original equity)

• Capital call Sources and Uses:

  • Sources:

    • $5mm in proceeds from (usually only or at least mostly) LPs

  • Uses:

    • $2mm rate cap purchase

    • $0.5mm working capital

    • $2.5mm GP loan payoff (loan made in 2023 or early 2024)

Now you’ll notice that the GP loan payoff above is stated clearly - of the cases I’ve advised on, I’d say that an overwhelming majority of GPs don’t make it this clear.

Having said that, let’s assume for a second that the GP did state the loan payoff clearly … at which point is the above proposal ethical from the perspective of an LP and - conversely - when is it concerning?

First, I’d like to explain why this topic is so intricate, from both sides: