A growth fund owns 14% of Shikharik Consumer and the company lists at Rs 6,000 crore. The fund can sell only part of its stake in the IPO and must hold the rest through a lock-up. What does it actually realise?

The fund realises Rs 693 crore, 2.48x its Rs 280 crore, an IRR of about 23%. At listing the stake was marked at Rs 840 crore, 3.0x, but only 30% of it could be sold there. The 70% held through the lock-up fell 25%, costing Rs 147 crore. In a listing, the mark on day one and the cash a large holder banks are different numbers.

Picture a farmer whose crop is valued at the morning's market price, but who is allowed to sell only a third of it today and the rest a week later. Whatever the price does that week, he bears. A large pre-IPO holder is in the farmer's position: the listing price values its whole stake, but it can sell only part of it at that price. The rest sits under a lock-upA period after listing during which existing shareholders may not sell. It stops early holders flooding the market on day one., exposed to whatever happens to the share price.

Start with the mark. The fund paid Rs 280 crore for 14%, valuing Shikharik at Rs 2,000 crore. At Rs 6,000 crore its 14% is worth Rs 840 crore, 3.0x in four years, about 31.6% a year. That is the number the fund's quarterly report will show, and it is not yet a rupee of cash.

In the IPO it sells 30% of the stake: 30% of Rs 840 crore is Rs 252 crore, in year four. The remaining Rs 588 crore of shares sits for six months, falls 25%, and sells for Rs 441 crore in year four and a half. Total proceeds are Rs 693 crore, 2.48x, and the lock-up alone cost the fund Rs 147 crore. Every further 10% fall in the share price during the lock-up costs another Rs 58.8 crore.

A lock-up expiry is a known date on which a large block of shares becomes free to sell, and the market knows it. Buyers can wait, so the price often softens into the date. The fund's realised return depends on how much it can sell before the lock-up and on what the market does during it, neither of which the listing price captures. Funds respond by negotiating a larger sale in the IPO itself, by planning a block sale to institutions on expiry day, or by staggering sales over months to avoid swamping the order book.

Note the regulatory framework too. Indian listing rules lock in pre-issue shareholding for a period after listing and treat some categories of registered funds differently, depending on how long they have held. The exact periods and conditions change, so state the framework and confirm the current rule before modelling the exit. The judgement for this case: a 2.5x in four and a half years is a good outcome, but the gap to the 3.0x headline is the honest number to show LPs.