The fixed-income universe, spanning both public and private markets, offers a broad spectrum of instruments across different durations, risk levels, and liquidity profiles. Among the growing areas within private credit, capital call finance has emerged as a low-risk, short-duration segment offering attractive, stable yields with minimal default risk.

“Capital call facilities are simply loans that allow private market funds to finance a new investment before calling capital from its limited partners,” explains Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management. “Capital call finance acts as a working capital facility for private market funds. Instead of calling the capital directly from the limited partners, the manager can draw under a capital call facility to finance the purchase of a new asset, and the loan is eventually repaid once the fund makes the capital call to the LPs,” he elaborates. “The lenders providing these loans have recourse to the uncalled commitments of the LPs.”

“Capital call facilities are simply loans that allow private market funds to finance a new investment before calling capital from its limited partners.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

Benefits Across the Chain

Capital call finance benefits all parties involved: general partners, limited partners, and end-investors in capital call finance strategies. For managers, these facilities offer flexibility and speed. “They allow funds to operate more efficiently, functioning as a working capital line that provides flexibility to deploy capital,” reiterates Kroes. Although still considered a niche strategy by many investors, capital call finance has existed for over 25 years. “Almost all private market funds have a capital call facility in place, typically ranging from 25 to 40 percent of LP commitments,” he notes.

Limited partners also benefit from these structures. “For LPs, it’s much easier because they don’t have to make capital calls on short notice,” explains Kroes. “It creates a much more stable capital deployment pattern, allowing them to plan liquidity needs more effectively.”

“For LPs, it’s much easier because they don’t have to make capital calls on short notice. It creates a much more stable capital deployment pattern, allowing them to plan liquidity needs more effectively.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

For investors in capital call finance strategies – the ones providing the loans – the segment offers short duration, high credit quality, and attractive yields. “Capital call facilities typically provide a spread pick up of 100-150 basis points above public markets,” says Kroes. “It also offers diversification benefits by exposing them to different risk drivers compared to traditional public market exposures.”

“It’s a very attractive spread pickup and it allows investors to tap into different risk factors while diversifying their fixed income or private credit allocations.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

Aegon’s newly launched Aegon Capital Call Finance Fund targets an average spread of 175-200 basis points, significantly higher than the 50-75 basis points available in comparable public market instruments with a similar duration and risk profile. “It’s a very attractive spread pickup,” Kroes emphasizes, “and it allows investors to tap into different risk factors while diversifying their fixed income or private credit allocations.”

Understanding the Risk

A typical capital call loan has a maximum tenor of 12 months. Within the European market, the legal documentation between the fund and its investors normally includes provisions to limit the period the borrowings can be outstanding, “although in the U.S. market, we see more room for longer tenors,” says Kroes. Although capital call facilities are used by private equity, private debt, infrastructure and other private market funds, Aegon’s main focus has been on providing financing to private equity buyout funds, as this has historically been the largest segment of the market and offers the best returns.

Each capital call facility has recourse to a well-diversified, high-quality investor base, which is central to the strategy’s risk management. “The investors in these funds typically comprise a portfolio of 50 to 150 limited partners, with the largest LPs usually accounting for no more than 10 percent,” says Kroes. The LP mix spans insurance companies, banks, endowments, pension funds, and sovereign wealth funds. “We look for diversification not only in investor type but also geographically,” he adds. This broad distribution across regions and institutional types helps ensure low concentration risk.

The key risk in capital call finance lies in the creditworthiness of limited partners, the ultimate source of repayment. “Because the primary recourse under a capital call facility is the LPs’ uncalled commitments, their credit quality is a critical factor,” explains Kroes. “But the analysis goes beyond ability to pay, it also involves assessing willingness and economic incentives to pay.”

“Because the primary recourse under a capital call facility is the LPs’ uncalled commitments, their credit quality is a critical factor.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

When Aegon first entered the space in 2018, as one of the first institutional investors active in capital call finance, the focus was mainly on LP credit quality. “Over time, we developed a more holistic underwriting framework,” notes Kroes. “Next to the LPs’ credit quality, we now also analyze economic incentives and willingness to pay.”

Kroes illustrates the importance of assessing willingness to pay with a hypothetical example: if a large sovereign wealth investor were asked to honor a capital call after a fund’s assets had become worthless, they might choose not to comply. This underscores why evaluating both the ability and willingness to pay is essential. This assessment, Kroes explains, involves analyzing several layers beyond pure credit metrics. “We focus on factors such as the volatility of the collateral assets, how their value might fluctuate over time, how much of the fund’s capital has already been deployed, and what the economic incentive is for the LPs to honor the capital call,” he notes. “These are all crucial elements to consider.”

“If an LP doesn’t pay, we can take over the stake it holds in the investment fund and sell it at a discount in the secondary market.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

In a worst-case scenario, if a limited partner refuses to honor a capital call, lenders like Aegon have mechanisms to protect their position. “If an LP doesn’t pay, we can take over the stake it holds in the investment fund and sell it at a discount in the secondary market,” says Kroes. “That’s why we continuously monitor what types of assets the fund holds and how its NAV is performing to ensure the LP remains motivated to meet its commitments.”

The Aegon Capital Call Finance Fund

Building on a decade of experience, Aegon launched the Aegon Capital Call Finance Fund earlier this year, providing institutional investors access to this niche, short-duration lending strategy. Unlike many peers, Aegon’s fund focuses only on fully drawn term facilities. “A large part of the market consists of revolving credit facilities with both drawn and undrawn portions,” Kroes explains. “The undrawn portions generate only a small commitment fee, which can create cash drag. Our fund avoids that by focusing exclusively on fully drawn term facilities, mainly in euro-denominated assets.”

The team also prefers mid-sized managers, typically with €10-25 billion in assets under management, where spreads can be more attractive. “We also aim to cap the weighted average life of the fund at 12 months,” says Kroes. “That allows us to maintain a semi-liquid structure, quite different from the U.S. market, where maturity profiles on drawn portions of the capital call facilities can extend to five or seven years.”

Evolving Market Dynamics and Aegon’s Position

The capital call finance market has evolved in tandem with broader private asset markets. “If you look at the current environment, M&A and IPO activity have been somewhat subdued, and fundraising has become more challenging,” notes Kroes. “At this point in the cycle, there are fewer new investment funds coming to market, which naturally affects the demand for capital call facilities. Right now, there’s actually more supply than demand in this segment.”

However, sentiment is beginning to turn. “We’re starting to see fundraising activity picking up again, along with renewed momentum in M&A and IPO markets,” says Kroes. “As those trends continue, we expect the demand for capital call facilities to increase and with more competition for financing, terms are likely to become slightly more favorable for investors like us.”

“Credibility is crucial. To operate successfully in this market, you need history, a proven track record, and a strong network of counterparties that trust you to deliver.”

Vincent Kroes, Senior Portfolio Manager at Aegon Asset Management.

Having been active in the space since 2018, Aegon Asset Management has established itself as a trusted and experienced partner in the capital call finance market. “Our team has been transacting in this segment for around ten years, completing roughly €4 billion in transactions across a broad range of banks,” Kroes says. “We’ve built credibility and long-standing relationships with our sourcing partners by being transparent, responsive, and efficient.”

That combination of experience, credibility, and speed of execution is key in private markets, where reputation and reliability matter as much as pricing. “Credibility is crucial,” Kroes concludes. “To operate successfully in this market, you need history, a proven track record, and a strong network of counterparties that trust you to deliver.”