Drawdowns in Private Equity Real Estate

Private Equity:

In private equity, money that is committed by limited partners to a private equity fund is referred to as committed capital. This is money that investors have promised to contribute to the fund in order to purchase an asset or fund any expense. The full capital commitment is rarely invested immediately and is drawn down over time as more investment opportunities are identified.

A drawdown (aka capital call) is the legal right of a private equity firm to demand a portion of the committed capital from the limited partners to pay for a newly identified investment or expense. It is the act of transferring the promised funds to the investment target. 

The cumulative amount of capital that has been drawn down is called “paid in capital”. The amount of paid in capital that has been invested is referred to as “invested capital”.

Limited partners contribute to the funds pro rata, meaning that their contribution during the capital calls are proportional to the total capital committed to the fund.

EXAMPLE:

Here is an example of a drawdown (capital call) in the multifamily acquisitions model from Top Shelf Models:

In the Waterfall section of the model above, we can see that the capital call occurs in month 0. This model assumes that the total capital is called in the beginning rather than incrementally. This amount is linked to the peak capital in the levered summary section of the monthly cash flows model (as seen below). Peak capital refers to the amount of equity capital that is put into the investment. 

Loans:

Drawdowns in lending refers to the ability to borrow money in chunks from the total loan amount, instead of taking out the full amount in which all the capital might not be needed. These are commonly seen in construction projects, tenant improvements for office buildings, etc. Usually, the equity portion of the total capital is utilized before drawdowns from the loans begin. Drawdown loans provide the reassurance of having access to more money in the future if needed.

EXAMPLE:

Here is an example of a drawdowns (proceeds) in the multifamily development model from Top Shelf Models:

As seen in the monthly levered cash flows section of the model above, the loan proceeds begin after the third month after all the equity has been used to fund the project. From there on, incremental proceeds are made to fund the development. 

Conclusion

A drawdown/capital call is the demanding of funds promised from the limited partner for an investment. The committed capital usually is drawn out over a period depending on the investment opportunities that arise. In modeling, the capital call is usually seen at the beginning of the investment period and is equal to the peak capital. 

In lending, drawdown loans or proceeds allow the borrower to take out a loan in smaller portions based on the requirement. This allows for a more efficient use of loan funds and gives the borrower the facility to access more money in the future if needed.

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About the Author

Eric Bergin is the founder of TSM. He realized that there was a need for real estate financial models that were more than just generic templates. He wanted to create a personalized product for his customers that would ensure success for them and their company. Please reach out to him if you have any questions regarding discounted cashflows or if he can help you with your modeling needs.