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.
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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?