Capital Call: One Call Split Across Twelve Investors Pro Rata

A capital call is split pro rata: each party pays its own commitment divided by total commitments, multiplied by the amount called. In Nilgiri Growth Partners Fund II, invented, drawdown 2 of Rs 55,00,00,000 against Rs 5,00,00,00,000 of commitments is 11.0 per cent of every commitment, so investor 1 pays Rs 11,00,00,000, investor 12 pays Rs 55,00,000 and the manager pays Rs 1,10,00,000.

Think about eleven neighbours who agree to share the cost of a lift for their building. Nobody puts in the whole amount on day one. The neighbours agree instead what fraction of every future bill each one carries, and then, whenever a bill arrives, somebody does one division and sends eleven messages. The bill for the shaft is large and the bill for the annual service is small, but the fractions never move. A private fund runs on that same arrangement, scaled up, written into a contract, and repeated seventeen times over nine years. The arithmetic is one multiplication done thirteen times, and what makes it worth setting out is not the arithmetic but the thing the arithmetic holds still.

The thing it holds still is each party's stake in the fund. Because the percentage applied to a call is identical for everybody, no party can be drawn on faster than another, no party's slice drifts, and the shape of the fund on the last day is the shape agreed on the first. The identical percentage is the whole of the subject. Everything below is that one property worked to the rupee, on a fund whose numbers are locked so that they can be checked.

What does the rule actually say, and how few numbers does it need?

A capital call is a written instruction from the manager to every party that has promised money, telling them to send some of it. The instruction is the same for all of them and the amounts are not. One instruction becomes thirteen different amounts pro rataIn proportion, so that each party's share is its own commitment divided by the total of all commitments.. The rule fits on one line.

Take the amount being called. Divide it by total commitmentsEvery party's promised amount added together, the manager's own promise included., meaning every promise the fund has collected added together. One division gives one rate. The rate multiplied by any party's own promise gives that party's share of this call. Two numbers set the rate for the whole fund, and the third number belongs to whichever party is being looked at.

Nilgiri Growth Partners Fund II is the fund used throughout. Twelve investors have promised it Rs 4,90,00,00,000 between them and the manager has promised a further Rs 10,00,00,000, so the total against which every call is divided is Rs 5,00,00,00,000. Drawdown 2 of that fund, issued at its Year 1 Quarter 3, called Rs 55,00,00,000. Rs 55,00,00,000 divided by Rs 5,00,00,00,000 is 0.11, and 0.11 is 11.0 per cent. Eleven per cent is the rate, and it is the only rate on the notice. There is no second rate for large investors, no floor for small ones, and no separate arrangement for anybody who happens to be sitting on the committee.

Notice how little the rule needs. The rule never asks about the purpose of the money. Nor does it ask how much each party has already paid in, or how much is left of its promise, or whether it paid the last call on time. No fee arrangement enters it. The drawdown noticeThe written call itself, naming the amount, the purpose and the date by which the money is due. that lands in thirteen inboxes carries thirteen different figures, and every one of them came out of the same two-line sum.

What does drawdown 2 look like, party by party, to the rupee?

Here is the whole of it. Thirteen parties, thirteen commitments, one rate of 11.0 per cent, thirteen shares, and a running total that has to land on the notice. The last column, read downwards, is the notice being assembled out of its parts.

Investor 1 is a domestic life insurance company that promised Rs 1,00,00,00,000, so it pays 11.0 per cent of that, being Rs 11,00,00,000. Investor 12 is a co-investment vehicle for the manager's own senior staff and promised Rs 5,00,00,000, so it pays Rs 55,00,000. The two investors are twenty times apart in rupees and not one basis point apart in percentage. Every share in the table below is the same eleven paise in every rupee promised. Compute any one of the thirteen and the other twelve follow, without being told a single one of them.

Down the third column the arithmetic is visible without a calculator. Rs 75,00,00,000 at eleven paise in the rupee is Rs 8,25,00,000. Rs 80,00,00,000 gives Rs 8,80,00,000. Rs 60,00,00,000 gives Rs 6,60,00,000. Rs 25,00,00,000 gives Rs 2,75,00,000. Rs 15,00,00,000 gives Rs 1,65,00,000. Investors 10 and 11 promised the same Rs 10,00,00,000 as each other, so they pay the same Rs 1,10,00,000 as each other. The equality is a small thing, and it shows the rule doing exactly what it claims and nothing else.

Two things about this particular call will not always be true, and each deserves a sentence. First, the rate came out at 11.0 per cent to the rupee, so not a single one of the thirteen shares needed rounding. Rs 55,00,00,000 against Rs 5,00,00,00,000 is eleven hundredths and nothing more. Second, every commitment in this fund is a whole number of crore, so every share is a whole number of rupees at that rate. A fund whose commitments were untidy, or whose call amount produced a recurring decimal, would need a stated convention for the last rupee. Nilgiri's figures need no such convention. Real funds often do, and a call that lands on a recurring decimal should come as no surprise.

Why does the largest investor pay the same percentage as the smallest?

Because the rate was never about the investor. The rate was computed once, from the size of the call against the size of the fund, before anybody's name was attached to it. The rate is a property of the notice. Each party contributes that one rate applied to a promise it made years earlier and has not changed since.

Put differently, each party has a sharing percentageA party's fixed slice of the fund, used unchanged for every call and every payment out. that was fixed at the final close and is used for everything afterwards. Investor 1 is 20.0 per cent of Rs 5,00,00,00,000. Investor 12 is 1.0 per cent. The manager is 2.0 per cent. The thirteen percentages add to 100.0 per cent, and a call hands each party its own slice of the amount being raised. Nobody pays the same rupees and everybody pays the same fraction, and that is not a coincidence of this call but the definition of the rule.

The fixed sharing percentage is what makes a private fund workable over a decade. An investor who joined at Rs 5,00,00,000 does not have to police whether it is being drawn on faster than the insurance company. There is one rate, so it cannot be. And the manager does not have to negotiate thirteen times a year about who funds what. The manager runs a division and sends the notices.

Is the manager called too, or does it sit the call out?

The manager is called, on exactly the same basis as everybody else, and that is the single point most readers miss on a first pass. The manager of this fund promised Rs 10,00,00,000 of its own money alongside the investors, held through Nilgiri Financial Holdings Private Limited, an invented sponsor company. The Rs 10,00,00,000 is a commitment like any other commitment. The promise sits inside the Rs 5,00,00,00,000 the rate is computed against, and the rate is applied to the manager too.

So on drawdown 2 the manager did not sign the notice and stand aside. The manager paid Rs 1,10,00,000, being 11.0 per cent of Rs 10,00,00,000, on the same day and out of the same division. The manager is a thirteenth party to every call in this fund and is drawn on at the identical rate. Thirteen shares, not twelve, are what add back to the notice.

There is a reason this catches people. The manager is on the other side of most conversations about a private fund. The manager is the party being paid a fee, the party proposing the investment, the party whose judgement is being bought. Filing it mentally under "not an investor" is easy, and the surprise comes when its name appears on the payment run. On this fund it is 2.0 per cent of total commitments, it has paid every call, and across all seventeen it has paid in Rs 9,60,00,000 of its Rs 10,00,00,000, with Rs 40,00,000 still unfunded. The proportions are the same as investor 1's, whose figures are a hundred times larger.

The management fee and the carried interest are covered separately. Neither touches this arithmetic. The fee arrangement of this fund does not change any of the thirteen commitments, so it cannot change any of the thirteen percentages, so it cannot change any of the thirteen shares of a call.

Which denominator, and what does the wrong one quietly do?

Here is the trap. Two totals sit next to each other in the documents of this fund and they differ by Rs 10,00,00,000. Investor commitmentsThe twelve investors' promises only, a smaller and different base from the total. are Rs 4,90,00,00,000. Total commitments are Rs 5,00,00,00,000. Both are real figures with real uses, and only one of them divides a call.

The manager's Rs 10,00,00,000 is being drawn alongside everybody else's, so the call divides by Rs 5,00,00,00,000. Dividing investor 1's Rs 1,00,00,00,000 by Rs 4,90,00,00,000 instead gives 20.408 per cent rather than 20.0 per cent, and 20.408 per cent of Rs 55,00,00,000 is Rs 11,22,44,898 to the nearest rupee, against the correct Rs 11,00,00,000. The wrong base overstates investor 1's cheque on this one call by Rs 22,44,898, and it does the same proportional damage to every other investor at the same time.

Does the same rule survive at the smallest call in the fund?

The rule survives, and watching it at the small end is the fastest way to be sure the rule is a rule and not a convenience. Drawdown 17 of this fund, issued at its Year 9 Quarter 1 to pay a fee and some expenses, called Rs 2,20,00,000. Drawdown 17 is one twenty-fifth of drawdown 2. Rs 2,20,00,000 divided by Rs 5,00,00,00,000 is 0.0044, or 0.44 per cent.

Apply that to the same thirteen promises and investor 1 pays Rs 44,00,000, investor 3 pays Rs 35,20,000, investor 5 pays Rs 22,00,000, investor 8 pays Rs 8,80,000, investor 10 pays Rs 4,40,000, investor 12 pays Rs 2,20,000 and the manager pays Rs 4,40,000. The twelve investors add to Rs 2,15,60,000 and the manager's Rs 4,40,000 takes the total to Rs 2,20,00,000 exactly. Dividing the call by twenty-five divides every share by twenty-five and changes nothing else, so every one of those thirteen numbers is exactly one twenty-fifth of the corresponding number on drawdown 2.

There is a practical reason the small calls matter more than their size suggests. Four of this fund's seventeen calls, the last four, were for nothing but fees and expenses, and together they came to Rs 24,50,00,000. The amounts look trivial next to a Rs 60,00,00,000 investment call, so fee calls are the ones an investor is most tempted to check casually. Fee calls are divided by exactly the same rule. A call fixes the record of who has paid in what, not merely the rupees, so an error in a small call is just as permanent as an error in a large one.

How do seventeen calls of different sizes leave everybody in the same place?

One call being fair is easy to believe. Seventeen of them, spread over nine years, sized anywhere between Rs 2,20,00,000 and Rs 60,00,00,000, issued for organisational costs and companies and fees and transaction expenses, is where a reader starts to suspect that the proportions must have drifted somewhere. The proportions have not drifted, and the reason is boringly mechanical. Each call was divided by the same rule against the same unchanged commitments, so each call handed every party the same fraction of itself. Adding fractions of the same size to the same base cannot change the base.

The arithmetic check is neat enough to be worth doing out loud. Each call has a rate: 2.62 per cent, then 11.0, then 9.0, and so on down to 0.44. Add the seventeen rates together and they come to 96.00 per cent. The 96.00 per cent is not an approximation. Because every party paid every rate on its own commitment, every party has paid in 96.0 per cent of what it promised. Investor 1 has paid Rs 96,00,00,000 of Rs 1,00,00,00,000, investor 12 has paid Rs 4,80,00,000 of Rs 5,00,00,000, and the manager has paid Rs 9,60,00,000 of Rs 10,00,00,000. Three very different amounts, one identical percentage.

Here is the same thing as rows rather than as a picture. Time is counted from the fund's own final close, so Year 9 Quarter 1 is a position in the fund's life and not a calendar date. Three of the thirteen columns are shown, being the largest investor, the smallest investor and the manager, and the rate column is the one to read: it is the same for all thirteen, on every line.

The 4.0 per cent that has not been called is each party's unfunded commitmentThe part of a promise that has not yet been asked for and can still be called., and it too is held in the same proportions. The fund has Rs 20,00,00,000 unfunded. Investor 1 holds Rs 4,00,00,000 of that, being its 20.0 per cent slice of Rs 20,00,00,000, and the subtraction is Rs 1,00,00,00,000 less Rs 96,00,00,000. Investor 12 holds Rs 20,00,000 unfunded and the manager holds Rs 40,00,000. Nothing in that sentence required a new calculation: it is the same thirteen percentages read against a different total.

One shape in the table is worth naming because it is not about pro rata at all. The first thirteen calls, all of them inside the fund's five-year investment periodThe stretch at the start of a fund's life during which capital may be called for new investments., account for Rs 4,55,50,00,000 of everything ever drawn. The last four, spread across the following three and a half years, are fees and expenses and nothing else, and together they are Rs 24,50,00,000. The rule that divides them is identical. Across the life of a fund the reason for the money changes. The way the bill is split does not, and the two questions are worth keeping apart.

What can take one investor out of the split, and what cannot?

Almost nothing can, and the exceptions are worth knowing precisely because they are so few. The percentage-for-everybody property is written into the contract, so only something else written into the contract can break it.

The one that actually does is an excuse rightA contracted right allowing one investor to be left out of a particular investment.. In this fund, investor 3 is an overseas sovereign-linked investor and it has a right to be excused from any investment in a sector its own mandate excludes. If the fund ever calls capital for such an investment, investor 3 is left out of that call, and the remaining twelve parties fund the whole amount between them in their own relative proportions. For that one call, and only that one, the identical-percentage property does not hold, and everybody else pays slightly more than they would otherwise have paid. No excuse was exercised on drawdown 2, and all thirteen shares on that notice are therefore clean 11.0 per cent figures.

Fees, seats and size do not break the property. Investor 1 has a seat on the investor advisory committee and a right to elect into terms given to later investors of its size or smaller; neither changes its 20.0 per cent. The manager bears investor 12's management fee and carried interest itself rather than the fund rebating them. Investor 12 is still called at 1.0 per cent of every notice, exactly like everybody else. Investor 4 has a transfer right. Investor 8 has a notification right. None of those five arrangements moves a single rupee of any call, and a reader who assumes that a negotiated term must show up in the drawdown arithmetic will look for a difference that is not there.

Two more things do not break it either, and both are asked about often. A party that pays late has not changed its share. Late payment creates an unpaid balance, and the remedies a partnership agreement carries for one differ from fund to fund and are covered separately. And a party that transfers its interest to somebody else has not changed the share either; the share travels with the interest, and the new holder is called at the same percentage the old one was.

What does somebody actually do with this the day a notice lands?

Three different people read the same notice for three different reasons, and all three are doing arithmetic rather than judgement. Walking through all three turns an abstract rule into a set of things somebody can actually check.

The operations person inside an investor runs a two-line test. Take the amount on the notice, divide by the fund's total commitments as stated in the fund's own documents, and confirm the resulting rate applied to that investor's commitment reproduces the figure the notice is asking for. If it does not, the first suspect is the denominator and the second is a call that is not pro rata for a contracted reason. The operations person also reads the due date against the notice period the documents of this fund set. The period is a contracted term of this fund rather than a rule of anything.

The finance person inside the manager runs the reverse test before the notice goes out. Compute all thirteen shares, add them, and confirm the sum equals the amount being called to the rupee, not to the nearest thousand. On this fund that check reads Rs 53,90,00,000 from the twelve investors plus Rs 1,10,00,000 from the manager, being Rs 55,00,00,000. Farida Contractor, invented, is the officer who signs the drawdown notices of this fund, and a signature over an unreconciled schedule is how thirteen wrong capital accounts start.

The analyst reading a fund from the outside uses the property rather than the arithmetic. Because the split never varies, the analyst can take any single party's paid-in figure and scale it to the whole fund, or take the fund's figure and scale it down to a party, with no information beyond one commitment and one total. A fund drawn strictly pro rata can be read from any one of its thirteen seats. A fund with negotiated per-investor drawdowns cannot be read that way. That is the practical value of the rule, and it is why the first question to ask of any private fund's numbers is whether every party really was drawn on the same basis.