If an LP fails to fund a capital call, the outcome usually depends on the LPA, but common paths are:
- Best outcome: the LP sells their entire fund interest to a replacement buyer, subject to GP approval
- Alternative: the LP’s commitment is effectively reduced to the amount already funded, which also reduces future capital available to the fund
- Last resort: the GP invokes the default provisions in the LPA, which may allow penalties or a forced sale at a discount
All LPs should stay on the same capital call schedule; making exceptions creates fiduciary issues.
Reference:
- https://decilehub.com/base/1-general_questions/21163-1-what-happens-to-the-overall-committed-capital-for-portfolio-companies-in-case-of-a-partial-or-complete-lp-default-how-can-gps-mitigate-the-risk-that-there-is-no-additional-capital-once-there-is-a-default-e-g-a-forced-sale-is-not-possible
- Best outcome: the LP sells their entire fund interest to a replacement buyer, subject to GP approval
- Alternative: the LP’s commitment is effectively reduced to the amount already funded, which also reduces future capital available to the fund
- Last resort: the GP invokes the default provisions in the LPA, which may allow penalties or a forced sale at a discount
All LPs should stay on the same capital call schedule; making exceptions creates fiduciary issues.
Reference:
- https://decilehub.com/base/1-general_questions/21163-1-what-happens-to-the-overall-committed-capital-for-portfolio-companies-in-case-of-a-partial-or-complete-lp-default-how-can-gps-mitigate-the-risk-that-there-is-no-additional-capital-once-there-is-a-default-e-g-a-forced-sale-is-not-possible