Case 017Fund, LP and portfolio analyticsHard
A family office with a Rs 1,000 crore portfolio wants 10% in private equity. Funds call 25% of commitments a year for four years and distribute from year 5. How much should it commit each year to reach and then hold the target?
1The situation
Sanrakshak Family Office runs Rs 1,000 crore, mostly in listed equities and bonds, and has decided to hold 10% of it, Rs 100 crore of net asset value, in private equity funds. It has never committed to a fund before.
Assume a typical fund calls 25% of the commitment in each of its first four years, that the invested capital grows at 12% a year, and that the fund sells its companies and returns the money over years 5 to 8, a quarter of the remaining value in year 5, a third in year 6, half in year 7 and the rest in year 8. Hold the Rs 1,000 crore flat so the target stays Rs 100 crore. These are planning assumptions; real funds vary widely.
2Your task
Model one fund, then a commitment programme. Say how much to commit each year to reach Rs 100 crore of NAV and hold it, and why committing Rs 100 crore once does not work.
Quick check
To hold Rs 100 crore of private equity NAV, how much does the office need to have committed in total across its live funds?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Commit about Rs 20 crore a year, every year, with the first two years front-loaded to Rs 40 and 30 crore to reach the target by year 5 rather than year 10. A single Rs 100 crore commitment peaks at Rs 119 crore of NAV in year 4 and is back to zero by year 8. Because capital is called slowly and returned from year 5, holding Rs 100 crore of NAV needs about Rs 160 crore of commitments live at once, with Rs 30 crore of it still uncalled.
Step 1What does one fund do to your money?
A fund commitment is like promising a builder Rs 100 crore for a project: you hand over Rs 25 crore a year as the work proceeds, and the finished flats are sold and the money returned over the following years. At no point do you have Rs 100 crore invested: NAV peaks at Rs 119 crore in year 4, after the last call and three years of growth, and from year 5 the distributions shrink it to zero by year 8. Over its life the fund calls Rs 100 crore and returns Rs 160 crore, a 1.6x. The shape is what matters for pacing: a slow build, a short peak, a fast run-off.
Step 2Why does committing Rs 100 crore once fail, and what holds the target?
Because the one fund is a wave, not a level. The office would be under target for three years, at 119% of it in year 4, and at zero again by year 8. To hold a level you need a new wave every year, so that one vintage's run-off is another's build; summed across eight live vintages, each rupee committed a year supports about Rs 5.0 crore of NAV, so Rs 100 crore of NAV needs about Rs 20 crore of new commitments a year. That steady state has Rs 160 crore of commitments outstanding and about Rs 30 crore of them not yet called, which must be kept liquid elsewhere in the portfolio.
| C | the commitment made each year, Rs crore |
| n_a | NAV per rupee committed for a fund of age a, from the one-fund model |
| 100 | the target NAV, 10% of the portfolio |
Step 3How fast can the office get there?
A constant Rs 20 crore a year reaches only Rs 100 crore by year 10, because the early vintages are still building. Front-loading, Rs 40 and 30 crore in the first two years and Rs 20 crore after, reaches the target by year 5, peaks about 16% over it in years 6 and 7 while the large early vintages sit at full value, and settles at Rs 100 crore by year 9 as they run off. The cost is that overshoot, and the fact that the two largest vintages are the ones chosen when the office had least experience.
| Year | Calls | Distributions | NAV at year end | Uncalled commitments |
|---|---|---|---|---|
| 1 | 10.0 | 0.0 | 10.0 | 30.0 |
| 2 | 17.5 | 0.0 | 28.7 | 42.5 |
| 3 | 22.5 | 0.0 | 54.6 | 40.0 |
| 4 | 27.5 | 0.0 | 88.7 | 32.5 |
| 5 | 22.5 | 13.4 | 108.5 | 30.0 |
| 6 | 20.0 | 25.0 | 116.5 | 30.0 |
| 7 | 20.0 | 34.7 | 115.7 | 30.0 |
| 8 | 20.0 | 45.6 | 104.0 | 30.0 |
| 9 | 20.0 | 36.7 | 99.8 | 30.0 |
| 10 | 20.0 | 32.0 | 99.8 | 30.0 |
The limits are the assumptions. If the listed portfolio grows, the target grows with it and the commitment must rise; if funds return money faster than years 5 to 8, or slower, the multiplier of 5.0 changes. The number to carry is not Rs 20 crore but the method: model one fund, sum the overlapping vintages, and recommit every year whatever the market is doing, because skipping a vintage opens a hole in NAV four years later.
Where candidates lose it
The usual loss is committing the target amount once and calling the job done. NAV from a single fund peaks at about Rs 120 crore in year 4 and is gone by year 8; the allocation is a wave, not a level, unless commitments repeat.
The second miss is forgetting the uncalled money. A steady programme has about Rs 30 crore of commitments outstanding that can be called at any time, and the office must hold that in liquid assets, which lowers the return on the rest of the portfolio.
What the interviewer asks next
- The listed portfolio grows 8% a year. How does the commitment schedule change?
- A secondary purchase of a four-year-old fund interest is offered. How does it change the pacing?
- What happens to the programme if the office skips commitments in years 4 and 5 because markets look expensive?
Company names and figures are illustrative.