Introduction
When a limited partner (LP) signs a capital commitment to a private equity fund, it hands the timing of its own cash flows to someone else. The general partner (GP) decides when to draw the money, and under the Institutional Limited Partners Association (ILPA) Model LPA the LP may get as little as ten business days to wire it. The GP also decides when to sell companies and send cash back. The LP controls neither date, yet it must meet every call on time.
That asymmetry is the LP cash flow problem: keeping enough liquidity for calls that arrive on the GP's schedule while the distributions meant to pay for them arrive on the market's. When exits stall and calls do not, it becomes a reason to sell, one of the pressures described in why LPs and GPs need liquidity and a steady source of secondary market supply.
How a Capital Call Works: Notice, Funding, and Default
A capital call, or drawdown, is the GP's demand for part of each LP's commitment. The ILPA Model LPA requires a drawdown notice that explains the purpose, including the portfolio company and the split between investment, expenses, and management fees, at least ten business days before the due date. Market LPAs vary. ILPA's capital call and distribution template guidance of September 2025 adds a standalone section showing how each notice changes the LP's remaining commitment, the figure its treasury team plans around.
- Unfunded Commitment
The part of a limited partner's commitment to a private fund that the general partner has not yet called. It is a contractual obligation to pay on demand within the agreed notice period, it can rise when distributions are recallable, and it passes to the buyer when the interest is sold.
The path from notice to default is short, and once a notice arrives the LP's only defenses are cash on hand and a few days' grace:
Drawdown notice
The GP sends each LP its share of the call, the purpose, and the due date, at least ten business days ahead in the Model LPA.
Funding
The LP wires the amount by the due date, and its unfunded balance falls by the same amount.
Default notice
If the payment is missed, the GP notifies the LP in writing.
Cure period
The Model LPA allows a bracketed five business days before the LP becomes a defaulting partner, unless the GP waives the default.
Default remedies
The LPA's defaulting-partner provisions apply, drafted to make missing a call far costlier than meeting it.
Those remedies, set out in the limited partnership agreement article, are harsh by design, because each LP's reliability underwrites the others and the lenders who advance against their commitments. They are also why an LP treats its unfunded commitment as a liability, certain in total and uncertain only in timing.
Distributions and Recallable Distributions: Cash Back on No Fixed Schedule
Distributions run the other way: proceeds from exits, dividend recapitalizations, and portfolio income, paid through the fund's waterfall. Their timing depends on when the GP judges an exit worth taking and their size on the price achieved, so a fund's distribution history is lumpy even when its performance is steady.
Not every distribution is final. Many LPAs let the GP recycle capital by recalling amounts distributed from quick realizations or equal to fees, and the 2025 ILPA template treats a recallable amount as an increase in the LP's unfunded balance that the notice should flag.
- Recallable Distribution
A distribution that the fund agreement allows the general partner to call back from limited partners, typically amounts equal to capital from investments sold soon after purchase, fees, or the proceeds of certain fund borrowings. Until the right lapses, the amount is added back to the LP's unfunded commitment.
A recallable distribution therefore sits between cash and a loan: an LP that spends it on another fund's calls must find the money again when the recall comes, so careful treasury teams track recallable balances beside unfunded commitments rather than inside cash.
The Cash Flow Problem: Funding New Calls From Old Distributions
An LP can meet calls from liquid reserves (cash, bonds, or public equities it is willing to sell) or from distributions on its older funds. Mature programs lean on the second, because reserves earn less and a program that commits only the cash it holds stays under-invested. That makes a self-funding program efficient in normal years and fragile in bad ones. How much to commit each year against expected distributions is the pacing question covered in LP portfolio construction.
Net Funding Need: An Illustrative LP
Take an LP that commits $100 million to a new fund, whose calls come years before its own distributions (the J-curve), and plans to pay them from an older program's distributions. In the slowdown case, distributions fall by about 44% over four years while calls continue as planned. Figures are illustrative, in millions of dollars.
| Year | Calls on new fund | Distributions, base | Cumulative net, base | Distributions, slowdown | Cumulative net, slowdown |
|---|---|---|---|---|---|
| 1 | 25 | 20 | -5 | 20 | -5 |
| 2 | 25 | 25 | -5 | 12 | -18 |
| 3 | 20 | 30 | +5 | 12 | -26 |
| 4 | 15 | 30 | +20 | 15 | -26 |
| Total | 85 | 105 | 59 |
In the base case the LP needs $5 million of reserves at the worst point and ends $20 million ahead. In the slowdown the same commitment needs $26 million, more than five times as much, with $15 million still uncalled. Nothing about the new fund changed: the whole net funding need came from the older funds' exits.
The 2022-2025 Stress Case
The last few years ran that slowdown at industry scale. MSCI researchers wrote in July 2024 that buyout and venture funds had been calling capital on net since 2022, leaving LPs as net contributors: funds inside their investment periods kept buying companies while exits slowed. Bain's 2026 Global Private Equity Report put the distribution rate at about 14% of NAV in 2025, the fourth straight year below 15% and a level last seen in 2008-09, and found investors increasingly constrained in making new commitments. For many programs the slowdown column became real, and the gap came from reserves, fewer commitments, or sales.
Subscription Lines and NAV Loans: Tools That Move the Timing
Two fund-level financings change when LP cash moves, not how much moves, and both belong in an LP's reserve planning.
Subscription Lines: Fewer, Later, Larger Calls
A subscription line is a credit facility secured on the LPs' uncalled commitments. The fund draws on it to close a deal and calls capital later, often bundling several deals into one notice, so LPs see fewer, better-signposted calls. The cost is interest; the lift to reported IRR is worked through in reading a fund track record. For reserve planning, the drawn balance is capital the fund has already spent and the LP has not yet been asked for.
NAV-Loan Distributions: Early Cash That Can Come Back
A NAV loan is secured on the portfolio, and some GPs have used one to pay distributions that exits could not. ILPA's 2024 guidance on NAV facilities cited a Fund Finance Association estimate that 20% of such facilities had funded distributions, and warned that these are often recallable: if the facility breaches its loan-to-value test, the GP can recall the cash to pay it down, disrupting LPs' cash flow planning. The loan is also repaid from future exits, so part of today's distribution comes out of tomorrow's; NAV lending in practice covers terms and consents.
Why the Cash Flow Problem Creates Secondary Supply
An LP-led sale addresses both sides of the problem. The seller receives cash for the interest's NAV, and the buyer steps into its position, including the unfunded commitment and any recallable amounts, so the seller's future calls go too. For an LP in the slowdown column, selling a younger interest with a large unfunded balance can matter more than the cash raised. Buyers fund those calls at full value, one reason such interests draw lower bids, as pricing LP interests explains.
The pattern predates the recent drought. Harvard Management Company had made $11 billion of commitments to investment partnerships running through 2018, according to Moody's, and had met them with income from its existing private equity portfolio. In 2008 it set out to sell $1 billion to $1.5 billion of private equity interests, Forbes reported in February 2009, and by early 2009 high bids for such interests were around 60 cents on the dollar, according to Cogent, the adviser on the sale and later part of Greenhill.
The mechanics have not changed since 2008: commitments still bind, calls still come on short notice, and distributions still arrive when exits allow. What changed is the depth of the market that absorbs the problem. Evercore counted about $226 billion of secondary volume in 2025, and Jefferies put average LP portfolio pricing at about 87% of NAV, far from the 60-cent high bids of Harvard's attempt. For an advisor, a selling LP's call schedule and unfunded balance belong in the mandate from the first meeting, beside the NAV on offer.
