I hold back a third of my allocation for capital calls. Discipline or drag?

The third view doesn't survive. I've had a fixed rate deal on the active side need money because insurance renewed at more than double and the reserve was set on the old premium. Nobody misread anything, the market moved under a line item that used to be boring. Fixed rate debt protects you from one specific failure and there are others.

On your actual question, a third in cash is a lot. Two calls totaling 17 percent of two positions is maybe 5 or 6 percent of your book. Holding 33 percent to cover that is expensive insurance.

The dilution formula matters here, and I'd read it closely before concluding funding was right. Some LPAs dilute you at a punitive rate and some just recalculate your percentage pro rata, and those are very different decisions. thatch, do you know which yours was, and did you compare the diluted outcome to the cost of the check?

My own answer is to hold less than a third and more than nothing, maybe 15 percent, and to stop reinvesting distributions once a position looks like it's heading toward a call. The tell I watch for is a sponsor changing their reporting format.

The number that decides this is your worst-case simultaneous call exposure, not your realized one. Two calls at 11 and 6 percent is a sample of two. Read the capital call clause in every LPA you hold and add up the maximum callable amount as a percentage of your committed equity, then ask what correlates the calls. If your positions share floating rate debt with rate caps expiring in overlapping windows, or share a single insurance market, the calls arrive together and your realized 6 percent of book becomes a much larger number in one quarter.

Your comparison rests on the calls staying spread out. You priced the reserve against calls that happened sequentially. Sequential calls can be funded from distributions. Simultaneous ones cannot, and the penalty for failing to fund is set by the dilution mechanics anchor asked about, which vary deal to deal and are worth reading side by side before sizing any reserve.

On the drag, a reserve does not have to sit in a checking account. Short-duration cash instruments exist and the yield on them changes constantly, so confirm current terms with whoever holds the account rather than assuming last year's rate.

The underwriting-stage answer quarry pushed back on is partly right in a narrower form. Deals with fixed rate debt, a funded reserve at closing, and loan maturity comfortably past the stated business plan call capital less often. They still call. Treating a call as evidence of your own misjudgment will make you fund bad calls to protect your story, which is the more expensive error.