3 Keys to Accounting for Capital Calls and Distributions

Two business associates discussing accounting for capital calls and distributions

Capital calls, also called drawdowns, have become one of the most important tools for private equity firms and other investment firms. A capital call allows firms to request that investment partners help contribute towards future investments or expenses. The challenge is managing the accounting process associated with these transactions.

If your firm is constantly running into accounting issues with capital calls, it’s time to consider a solution to simplify the complexity. We recommend the best-in-class Oracle NetSuite ERP platform to help ease the stress of accounting for capital calls and distributions.

Why NetSuite for Capital Calls and Distribution?

We are confident that NetSuite is the best private equity accounting software platform. Consider how NetSuite can help in three specific areas related to capital calls and distributions.

1. Accounting Support for the Basics of Capital Calls

When partners buy into a P/E fund, they usually pay for a portion of the investment upfront and pay the remaining balance later when needed. The upfront payment is referred to as paid-in capital; the remaining amount is known as uncalled capital. The total amount committed during an investment is referred to as committed capital.

Once a partner has found their target investment and determined the amount of money needed, the partner will release a capital call notice to request funds from their limited partners. During this capital call process, there are some common issues that pop up that require accounting expertise to keep track of transactions:

  • The amount requested in the form of a percentage of money.
  • Committed Capital: the total amount the limited partners have already committed to paying.
  • Paid-in Capital: the amount the limited partner has already paid into the fund.
  • Date the funds must be received by.
  • Details of where to send the money.

Capital Call Example that NetSuite Can Manage

Suppose an investor has decided to put $500,000 into a venture capital fund with a 2-year drawdown period. The general partner (GP) will often request the $500,000 commitment over the next two years.

If the initial capital call request is 10%, the investor will have invested $50,000 of the $500,000 commitment, leaving a remaining balance of $450,000 to be paid over the next two years.

  • Paid-in Capital/ Initial Capital Call: $50k/10%
  • Committed Capital: $500,000
  • Uncalled capital: $450,000

After the initial investment, the GP can continue to request funds over the next two years to help with further investments or projects. NetSuite makes it easy to track the details of these transactions for accounting purposes. The platform can help your firm stay organized if you are working with multiple investors.

2. Accounting Support for Distributions

A distribution usually refers to the payment of assets from individual security, fund, or account to a beneficiary or an investor. One of the most common distributions is through a retirement account that kicks in once an account holder turns a specific age.

Distributions can also refer to payouts to shareholders via stock or cash or payouts through a mutual fund. These distributions go straight to the investor by check or electronic payment. Consider how NetSuite can help with accounting for the following examples.

  • Distributions from mutual funds: examples include interest income, capital gains, and/or dividends generated by the fund during a calendar year.
  • Stock and bond distributions: examples include principal, dividend, or interest payments sent by the issuer to shareholders. When an organization earns a profit, it can reinvest the funds into the business or pay part of the profit to shareholders via dividends.
  • Investment trust funds: given to investors monthly or quarterly; distributions act similarly to stock dividends.
  • Retirement account distributions: can occur at any time after an account is created. After a certain number of years, account holders may withdraw funds; they will pay a penalty fee if the amount withdrawn is more than their contributions.

3. Support with Legal Obligations

With accounting comes rules and regulations for capital calls and distributions. Capital commitments are often legally binding, so investors can face different penalties if they default or miss a capital call.

The penalties are often drawn out in a limited partnership agreement and signed by the investor during the initial investment. Penalties can include interest fees, debt sales to third parties, legal compensation, and loss of equity in the fund.

Distributions are often under a contract such as a partnership agreement or stockholders agreement and vary from each contract. NetSuite can help you maintain oversight over your entire portfolio so that you always remain compliant with legal requirements.

Let’s Discuss NetSuite for Accounting for Capital Calls and Distributions

NetSuite helps companies focus on managing their clients instead of worrying about accounting for capital calls and distributions. We can help by supporting the implementation of NetSuite for your investment firm.

We offer a dedicated solution called Finlyte ION that is tailored to the needs of private equity firms. We’ll help your firm quickly get up to speed so you can easily manage capital calls and distributions. Contact us today for a demo!