Capital Calls & Distributions: The Flow of Money

What’s up, everyone! Hope you’re having a great weekend! Today we’ll be discussing the flow of money

Click here to see our YouTube video

When money comes in from investors, where does it go?

This may seem like a dumb question, but the answer isn’t so obvious…

Flow of Money

Let’s say investor A puts in $10 million and investor B puts in $40 million to a fund.

What happens with that money?

Initially, you (the fund manager) need proof that they have that money, then you need to complete your docs and sub docs.

At that point, that money is still in the investor’s custody, but you give it direction.

They keep their money in their account until you need it.

A bank account needs to be set up for these funds, but not all banks are willing to work with your fund.

Lincoln Archibald did some research and found that different banks work with different funds…

  • Key Bank – Real Estate
  • PacWest – Venture Capital & Private Equity
  • UBS – Hedge

Back to the example…

You want to the funds in ABC company. You call the capital and transfer investor’s A and B money into a limited partnership bank, wait a few days, then invest the money into ABC company.

In most cases, the deployment period can last up to 3 years. This includes finding investors, raising capital, setting up docs, and investing.

The harvest period occurs 4 to 10 years after starting the fund.

The first exit or ‘payout’ might happen in year 5.

Where Does the Money Flow?

It goes back to the limited partnership bank account. Then, the fund manager decides if they will reinvest the money somewhere else or give the investor their long-awaited returns.

I said in my video…

“Typically, I’ve seen the latter. Fund managers find it super satisfying to give their investors a fat check after about 4 years of waiting.”

As the fund manager, you earn the performance fee (yay!), and that money goes to your personal general bank.

Part of the money also pays the management fee (RIA).

Watch this video to see my visual, but here’s a recap of the flow of money…

Investor -> LP bank -> ABC company -> *returns thereof -> LP bank -> Investor, GP bank (performance), & RIA (management).

In my video, Lincoln added…

“The investor’s disposable money probably isn’t just sitting in a bank account. They usually have it in a liquid investment like a mutual bond.”

Lincoln Archibald

Go With the Flow

You need to have a distribution plan before you get your fund started…

When do payouts happen? What percentage of the money goes where? This is crucial to determine if you and your investors want to make money.

Real estate funds have fast returns, while venture capital is slow.

“You’ve got to make a distribution schedule that makes sense with how you’re investing.”

That’s it for me!

See you soon,

Bridger Pennington

Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.

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