The Daily Technical #13: What does an inverted yield curve tell you?

Good morning. Welcome to the 13th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
In private equity, what is a capital call?

Start by explaining what a capital call is. Mention that it's also known as a “drawdown”.
"A capital call, or ‘drawdown,’ is a request by GPs to LPs to provide their committed capital..."

Explain when and why it happens. It occurs in the last stages of an investment deal and is meant to fund the acquisition.
"...typically happens in the last stages of an investment deal..."

Clarify the roles of General Partners (GPs) and Limited Partners (LPs) in this process. The GPs request the committed capital, and the LPs need to provide it.
"...GPs request the capital, and LPs must provide it..."

Highlight the timeframe (usually ~7-12 days) and what LPs can do with their capital in the interim (e.g., investing in low-risk instruments like mutual funds or government bonds).
"...LPs generally have ~7-12 days and can invest the capital in liquid assets like mutual funds..."

Lastly, mention the penalties LPs might face for failing to meet the capital call, like fee penalties or upfront payment of the remaining committed capital.
"...failing to provide the capital can result in penalties or upfront payment requirements."

Common Mistakes

1. Vague Definitions: Simply stating that a capital call is a money request without detailing its context can be confusing. Remember to specify it’s for closing investment deals.

2. Ignoring Roles: Forgetting to clarify who the GPs and LPs are and their roles can make your answer seem incomplete. Always explain who requests the capital and who provides it.

3. Missing Timeframe: Many students forget to mention the typical duration LPs have to fulfill the capital call. Including this shows you understand the process.

Key Takeaways / TLDR

• A capital call, or drawdown, is when GPs request committed capital from LPs to finalize an investment deal.

• GPs request the funds, LPs provide them within ~7-12 days.

• LPs face penalties if they fail to meet the capital call.

TODAY’S QUESTION
What does an inverted yield curve tell you?

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