ACCRUE FLOW
Back to Insights
Risk Management

Defaulting on a Capital Call:
Consequences and Remedies

Nov 29, 2025•15 min read

One of the most anxiety-inducing moments for limited partners in private equity, venture capital, or other alternative investments is receiving a capital call notice and realizing they may not have sufficient liquidity to meet the obligation. The question "what happens if you miss a capital call?" generates considerable concern among investors, and for good reason. The consequences of defaulting on a capital call can be severe, potentially resulting in the loss of your entire investment position and years of accumulated returns.

Are Capital Calls Mandatory? Can You Refuse a Capital Call?

Let's address these fundamental questions directly: Yes, capital calls are mandatory contractual obligations, and no, you cannot simply refuse a capital call without facing significant consequences.

When you commit capital to a private fund, you enter into a binding legal agreement—the Limited Partnership Agreement (LPA) or equivalent governing document. This contract explicitly grants the general partner the authority to call committed capital as needed for investments, expenses, or other fund purposes. Your signature on the subscription documents represents a legally enforceable promise to deliver funds when called.

Refusing a capital call constitutes a breach of contract. Unlike publicly traded securities where you can simply decline to invest additional capital, private fund commitments are irrevocable obligations that persist throughout the fund's investment period, typically lasting four to six years or longer.

Understanding Capital Call Risks: The Default Cascade

When an investor fails to meet a capital call by the specified deadline (usually 10-15 business days from notice), a cascade of increasingly punitive measures typically activates. Fund managers have developed robust enforcement mechanisms precisely because the entire fund structure depends on reliable capital availability.

1. Interest Penalties and Late Payment Fees

The first consequence is financial. Defaulting investors immediately begin accruing interest, typically at 12% to 18% annually. Administrative fees for managing the default can also accumulate quickly.

2. Dilution of Ownership Interest

If not cured, the GP may reduce the defaulting investor's capital commitment proportionally. You lose the right to participate in future investments while typically remaining responsible for previous contributions—receiving less upside while maintaining downside exposure.

3. Forfeiture of Interest: The Most Draconian Remedy

The most severe consequence is complete forfeiture. A defaulting LP can lose their entire investment, including all previous contributions and accumulated gains. The GP may sell your interest to other LPs at a steep discount, often for zero consideration.

4. "Bad Boy" Clauses and Additional Penalties

Beyond standard remedies, "bad boy" provisions can impose reputational damage, loss of information rights, exclusion from future funds, and litigation exposure.

The Practical Reality: How Often Are Severe Remedies Enforced?

While fund documents contain these draconian provisions, GPs don't always pursue maximum penalties, particularly for investors with strong track records who encounter genuine liquidity difficulties. However, this discretion is not an obligation. During periods of market stress, GPs are more likely to enforce harsh penalties to maintain fund stability.

Moreover, institutional investors with reputational concerns are much more likely to receive workouts or payment plans than individual investors. The harsh reality is that enforcement often correlates with your importance to the GP's broader fundraising ecosystem.

Protecting Yourself: Liquidity Management is Paramount

The severity of capital call default consequences underscores a critical principle for alternative investment participation: maintain sufficient liquidity to meet your outstanding commitments at all times.

Best Practices for LPs

  • •Conservative Pacing: Don't commit 100% of your allocation immediately. Pace commitments over multiple years.
  • •Maintain Liquidity Buffers: Keep liquid reserves equal to 50-75% of total unfunded commitments.
  • •Model Capital Call Timing: Project likely call patterns, recognizing acceleration in the first three years.
  • •Understand Total Exposure: Track unfunded commitments across your entire portfolio.
  • •Review Fund Provisions: Understand specific default remedies in each LPA before committing.
  • •Communicate Proactively: If anticipating difficulty, contact the GP immediately. Early communication may enable workouts.

The Bottom Line

Defaulting on a capital call is not a simple missed payment—it's a serious breach of contract with potentially catastrophic financial consequences. The combination of interest penalties, dilution, forfeiture risk, and reputational damage makes default one of the most expensive mistakes in alternative investing.

Before committing capital to any private fund, thoroughly understand the capital call mechanics, default provisions, and your genuine ability to meet obligations over a decade-long period. Alternative investments offer tremendous opportunities for portfolio diversification and returns, but only for investors who can reliably fund their commitments through complete market cycles.