A capital call worked component by component with one investor excused from the investment, the rounding residual placed once, and the shortcut that overcharges everyone.
When an investor is excused from an investment, the call is allocated component by component: the investment over the commitments of the investors who are not excused, the management fee and the fund expenses over everyone. On a 6,800,000 call against 200,000,000 of commitments, a 20,000,000 investor excused from a 6,047,350 investment pays 75,265 instead of 680,000, and the other seven pay its 604,735 between them, 11.11 per cent more of the investment each.
Worked in full in The Private Markets COO by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Excuse rights let an investor stand aside from a particular investment, usually for legal, regulatory or policy reasons written into the limited partnership agreement or a side letter. They are rare enough that the call template is rarely built for them, and common enough that every operations team meets one. The notice that goes out has to be right to the unit, reproducible by the investor, and consistent with the capital accounts that follow.
| Investor | Commitment |
|---|---|
| A | 50,000,000 |
| B | 40,000,000 |
| C | 30,000,000 |
| D | 25,000,000 |
| E, excused from this investment | 20,000,000 |
| F | 15,000,000 |
| G | 12,000,000 |
| H | 8,000,000 |
| Total commitments | 200,000,000 |
The call is 6,800,000: 6,047,350 for the investment, 615,150 of management fee and 137,500 of fund expenses. Without the excuse, every investor would pay 3.4 per cent of its commitment.
Investment: 6,047,350 × commitment ÷ 180,000,000 (A to H, without E)
Fee: 615,150 × commitment ÷ 200,000,000 (all eight)
Expenses: 137,500 × commitment ÷ 200,000,000 (all eight)
In Excel, with commitments in B2:B9 and an excused flag (1 or 0) in C2:C9:
=ROUND($F$1*B2*(1-C2)/SUMPRODUCT($B$2:$B$9,1-$C$2:$C$9),0) for the investment line.
The investment rate on the non-excused base is 3.3596 per cent of commitment, against 3.02 per cent had all eight taken part.
Each line is rounded to the unit. The rounded amounts add up to one more than the component on each of the three components: 6,047,351, 615,151 and 137,501, a residual of minus one each time. The written rule in this fund gives every residual to the largest holder, so investor A absorbs all three. A's raw investment share is 1,679,819.44; it rounds to 1,679,819 and the residual takes it to 1,679,818.
| Investor | Investment | Fee | Expenses | Total | Without excuse | Difference |
|---|---|---|---|---|---|---|
| A | 1,679,818 | 153,787 | 34,374 | 1,867,979 | 1,700,000 | 167,979 |
| B | 1,343,856 | 123,030 | 27,500 | 1,494,386 | 1,360,000 | 134,386 |
| C | 1,007,892 | 92,273 | 20,625 | 1,120,790 | 1,020,000 | 100,790 |
| D | 839,910 | 76,894 | 17,188 | 933,992 | 850,000 | 83,992 |
| E | 0 | 61,515 | 13,750 | 75,265 | 680,000 | −604,735 |
| F | 503,946 | 46,136 | 10,313 | 560,395 | 510,000 | 50,395 |
| G | 403,157 | 36,909 | 8,250 | 448,316 | 408,000 | 40,316 |
| H | 268,771 | 24,606 | 5,500 | 298,877 | 272,000 | 26,877 |
| Total | 6,047,350 | 615,150 | 137,500 | 6,800,000 | 6,800,000 | 0 |
The differences net to zero, and E's 604,735 is exactly 10 per cent of the investment, its share of commitments. The capital accounts must follow the same split: E's account takes fees and expenses but no cost of the investment, and it will receive nothing from that investment's proceeds. The excuse is a permanent fact about the deal, not a one-off adjustment to a notice.
The unfunded commitments move the same way. E's unfunded commitment falls only by the 75,265 it paid, so it remains available for later calls; A's falls by 1,867,979 rather than 1,700,000. Over several excused deals the investors drift away from their commitment ratios, and the next ordinary call, made pro rata to commitments, no longer brings them back into line. The fund's report of unfunded commitments by investor is where this shows first, and it is worth reconciling after every call that carried an excuse.
| Excused share of commitments | Excused investor's share, reallocated | Uplift on every other investor |
|---|---|---|
| 5% | 302,368 | 5.3% |
| 10% | 604,735 | 11.1% |
| 20% | 1,209,470 | 25.0% |
| 30% | 1,814,205 | 42.9% |
The uplift is 1 ÷ (1 − excused share) − 1, and it is not linear. Excusing a 30 per cent investor raises everyone else's exposure to that deal by 42.9 per cent, which is why many agreements cap the reallocation, or let the manager reduce the investment instead. The cap, when there is one, has to be applied before the rounding, and any amount it refuses comes out of the investment, not out of a different component.
The common mistake is to allocate the whole call, 6,800,000, over the 180,000,000 of non-excused commitments. E pays nothing at all, and its 75,265 of fee and expenses is pushed onto the other seven. Investor A is billed 1,888,890 instead of 1,867,979, an overcharge of 20,911. The total still agrees to 6,800,000, so a check that only ties the notice to the call amount passes. The check that catches it compares each investor's fee line with its commitment share of the fee.
Two controls, both cheap. Every component must tie to its own total, and each investor's fee and expense lines must equal its commitment share whatever the excuse. A notice that passes both, with the residual on one named investor, can be reproduced by any investor with a calculator.
The call, the notice period counted against the funding date and the facility borrowing base are all in the free workbook for this case. Reconciling the capital account that the call feeds is worked in how to reconcile a private fund capital account.
Under most limited partnership agreements, and in the worked case, yes. The excuse covers the investor's share of the investment it objects to, not its share of the fee or of the fund's expenses. On a 6,800,000 call the excused investor with a 20,000,000 commitment pays 61,515 of management fee and 13,750 of expenses, 75,265 in all. The agreement decides, so read the excuse clause.
Their share of that investment rises by the ratio of total commitments to non-excused commitments. Excusing a 10 per cent investor raises everyone else's share of the investment by 11.1 per cent; a 20 per cent investor, by 25.0 per cent; a 30 per cent investor, by 42.9 per cent. Many agreements cap how far an excused share can be pushed onto the others.
To one investor, chosen by a written rule, usually the largest holder. Rounding each investor's share to the unit left a residual of minus one on each of the three components in the worked case, and all three were absorbed by investor A. Spreading residuals across several investors makes the notice impossible to reproduce.
The Fund II call of 6.8 million, allocated component by component with an excuse right and the rounding shown, is worked in chapter 5 of The Private Markets COO and its companion workbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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