A family with Rs 60 crore has a 15% cap on illiquid assets. Private fund values rise 20% while listed equity falls 25%, pushing the illiquid share to about 22%. What must happen, and what must not?

The cap was breached by the denominator effect, not by new buying: private values rose, listed equity fell and old commitments were drawn. The family office must record the breach, freeze new commitments, confirm debt covers the Rs 4.5 crore still undrawn plus spending, and test the private marks. It must not sell fund stakes at a discount to force the ratio back: curing to 15% that way would cost about Rs 0.95 crore.

A slice of cake gets to be a bigger share of what is left when someone eats the rest of the cake. A percentage has two parts, and the illiquid share rose through the denominator effectA holding rising as a share of the portfolio because the rest of the portfolio has fallen, even though the holding itself has not been added to.: its own value went up while everything else fell, then calls moved more money into it. The listed fall did the most work, and it happened in the part of the portfolio that is marked to market every day, while private fund values are updated slowly.

Take them in order and watch the share. The 20% mark-up takes it from 14.0% to 16.3%; the 25% listed fall takes it to 19.4%, through the cap; and the Rs 1.5 crore of calls, paid from debt, takes it to 22.3%. The order changes the step sizes a little but not the total. Notice, too, that the private marks may be stale: funds valued quarterly and with a lag often have not yet reflected the fall that hit listed prices.

Four things, none of them a fire sale. Record the breach and its cause for the family, stop all new private commitments until the share is back under the cap, check that debt of Rs 11.1 crore covers the Rs 4.5 crore still undrawn plus a year or two of spending, and ask each fund for the basis of its latest marks. Then fix the policy itself: a cap written as a hard line should have a tolerance band and a cure period, for example a return to 15% within 24 months through distributions and growth, not forced sales.

Selling fund stakes to a secondary buyer would cure the ratio on paper. To reach 15% the family would sell about Rs 3.79 crore of fund value, and at an illustrative 25% discount it would crystallise a loss of about Rs 0.95 crore to fix a number. The second thing to avoid is the reflex rebalance: listed equity is now 56.3% against a 65% target, but topping it up from debt would drain the cash the capital calls need. Rebalance only from money above the call reserve.