Unethical capital calls
When GP ethics and alignment are at odds
Happy Sunday!
I’ve written before on the fact that not all capital calls are created equal, and have a fairly deep “library” of articles on the topic:
Two part series:
Criss cross rescue sauce - (if you haven’t read this one in particular, you should.. I keep seeing it play out weekly; my article title didn’t do the article justice, but you’ll understand why I chose it #noregrets ☺️)
Today I’d like to venture into a somewhat controversial zone: the ethics of making a capital call.
You might reasonably say “what do you mean ethics - GPs are free to do whatever they want!” This is certainly true, but I think we can all also agree that there are some bounds that would deem a capital call request deceptive, unreasonable, or even simply not in the best interests of the LP receiving it.
The underlying issue typically stems from the fact that GP/LP alignment shifts deeply during distress and this is typically where the divergence of incentives begin.
In short (would recommend reading the below article prior to continuing), a GP starts shifting priorities to cover themselves in a distressed scenario - often at the expense of the LP or their best interest. That’s precisely what we’ll discuss today because this is particularly common during capital calls.
I’ve advised on hundreds of capital calls now and talk to LPs all the time. While some LPs didn’t know that a capital call is even possible, many understand that sometimes they make sense for all parties involved. GPs, on the other hand, are essentially battling a fight of “do I cover for myself” vs “doing the right thing by my LPs at my expense.” As you can imagine, this is a tough balance and oftentimes mistakes are made.
The question for today, though, is how often are capital calls issued where even the GP knows with fairly deep certainty that the assumptions aren’t realistic? Here’s an actual example that I come across ~weekly: