Fund Formation and Term: How a Private Fund Comes Into Existence

A private fund comes into existence when a sponsor settles a vehicle, a trustee is appointed to hold its assets and a manager to make its decisions, and investors sign contracts promising capital not yet paid. The clock starts at final close. Nilgiri Growth Partners Fund II, invented, runs a ten year term from its own final close, with two one year extensions on conditions, neither taken at its record date.

Think about a wedding hall that a group of neighbours decide to build together. Before there is a hall there is a sheet of paper. Somebody has to hold the land, somebody has to decide what gets built, and each neighbour has to promise a sum they have not yet handed over. Nobody has paid anything on the day the paper is signed, and yet on that day the thing exists and the calendar starts running. Two years later, when the last neighbour's money is finally called for, nobody asks when the money arrived. The question is what the paper said. A private fund is exactly that: a contract before it is a portfolio, and a calendar that starts on a signing rather than on a payment.

A fund's own contract settles how it is brought into being, which single day starts the counting, how long the counting runs, what happens when the fund reaches the end of the counting with things it has not yet sold, and what the word extension actually means when it is written into a document rather than said out loud. Every figure below belongs to two invented funds run by an invented manager, and each one is named where it is used.

How does a private fund come into existence, and who brings it into being?

Three parties have to exist before the fund exists, and not one of them is the fund. The ordering sounds like a riddle and it is not. The ordering is practical, and a reader who has it the wrong way round will look for the fund's decisions in the wrong place for the rest of their working life.

The first is the sponsorThe party standing behind the manager and holding the manager's own commitment.. Nilgiri Financial Holdings Private Limited, invented, is the sponsor of Nilgiri Growth Partners Fund II, invented. The sponsor is the party that stands behind the arrangement and puts its own money in beside the investors' money. In Fund II the manager's own commitment is Rs 10,00,00,000 against total commitments of Rs 5,00,00,00,000, exactly 2.0 per cent, and the manager funds it in cash on the same calls as everybody else.

The second is the trusteeThe party holding the assets of an Indian pooled private vehicle settled as a trust.. Nilgiri Trusteeship Services Private Limited, invented, holds the assets of Fund II and has duties running to the people who benefit from them. The trustee does not choose the investments. The trustee holds what has been bought, and the trustee is the legal shoulder the whole vehicle rests on.

The third is the investment manager. Nilgiri Alternatives Advisors Private Limited, invented, makes the investment decisions, issues the capital calls, strikes the distributions with the administrator and is paid the management fee. The manager decides, the trustee holds and the sponsor stands behind, and the fund itself is the arrangement those three have brought into being rather than a fourth party sitting alongside them.

Notice what has not happened yet. No money has moved. The twelve investors of Fund II have signed contribution agreements promising Rs 4,90,00,00,000 between them, and on the day of signing the fund holds nothing. The first call, drawdown 1 of Rs 13,10,00,000, comes later and covers the organisational expenses of Rs 2,50,00,000 together with the first year's fee and running costs. A promise is the raw material, and a capital call turns the promise into cash on notice.

Why do this fund's documents talk about a general partner when it has none?

The words limited partner and general partner run across this entire subject, and they are used about Indian funds too. So it is worth saying plainly what Nilgiri Growth Partners Fund II, invented, actually is. Fund II is settled as a trust under an indenture of trust. There is no limited partnership here and there is no general partner as a matter of Indian law. The role a reader will see written up as the general partner's is discharged between the manager and the trustee, and the contract is a trust deed and a contribution agreement rather than a partnership agreement.

Why does the imported vocabulary survive anyway? Because the economics were designed in that form and carried across whole. The commitment, the capital call, the capital account, the preferred return and the profit share were all worked out in one legal shape and then written into another, and the words came with them. The borrowing is ordinary. A household still calls the room with the water tap a kitchen after the tap has moved to the yard. The vocabulary describes the economics, and the legal shape underneath it is a separate question that has to be asked separately every single time.

In practice both readings are done, always. The economic words are read because they are what the documents and the investors actually use. Then the vehicle itself is identified. The answer decides who holds the assets, who has duties to whom, and which document has to be opened to learn how long the thing lives. On Fund II the answer to that last question is the trust deed.

Which single day starts the clock, and why is it final close?

Every deadline this fund has runs from one day, and that day is final closeThe day a private fund stops accepting commitments; every deadline it has runs from this day.. Not the day the manager first had the idea. Not the day the trust was settled. Not the day the first investor signed, and not the day the first company was bought. Final close is the day the fund stops accepting commitments, and everything the fund will ever report is counted forward from it.

The distinction most often missed is between first close and final close. A fund can usually begin working once enough commitments are in, and that moment is first close. Investors admitted after it come in on the same terms, catching up on whatever has already been called. Final close is when the offer shuts and no further commitment is accepted. First close is when the fund may begin; final close is when the counting starts, and every term, period and performance date in this guide hangs off that one day.

The practical consequence is severe and easy to underrate. Anything that happened before final close is real, took months, cost money and shaped the fund, and none of it appears in a single figure the fund reports. The manager's fundraising costs, the months of meetings, the drafting, the negotiation of the six side letters: all outside. On Fund II, the first thing inside is drawdown 1 of Rs 13,10,00,000 at its Year 1 Quarter 1. Year 1 Quarter 1 is defined as the first quarter after final close, so all seventeen drawdowns fall after that day.

What stages does a closed-end fund move through, and how long is each one?

How a Private Fund Moves From Formation to Exit

Six stages, and their lengths are wildly unequal. The inequality is the first thing to see. A reader who imagines a fund spending its money evenly across ten years has the shape upside down. Here is Nilgiri Growth Partners Fund II, invented, on its own clock.

Stage one is the investment periodThe stretch during which capital may be called to buy something new., Fund II's Years 1 to 5, and it is half the total term. Thirteen of the seventeen drawdowns fall inside it, totalling Rs 4,55,50,00,000, or 94.9 per cent of the Rs 4,80,00,00,000 the fund has ever drawn. All nine holdings were entered inside it, the first at Fund II's Year 1 Quarter 3 and the last at its Year 5 Quarter 3. Five years to spend, five years to get the money back, and the buying half is finished before the halfway mark of the term.

When the investment period ends nothing dramatic happens on the day. The change is in what capital may be called for. After that point Fund II may call capital only for four things: a follow-on investment into a holding it already has, capped in total at 15.0 per cent of the Rs 5,00,00,00,000 of commitments; the management fee; the fund's own expenses; and obligations already committed under a signed agreement. Both of Fund II's follow-ons, Rs 15,00,00,000 into holding 1 and Rs 10,00,00,000 into holding 4, actually fell inside the investment period. The cap has never been engaged on this fund.

Stage two is the harvest stretch. From Fund II's Year 6 Quarter 1 to the record date the fund made four more calls, drawdowns 14 to 17, totalling Rs 24,50,00,000, and every rupee of the four is fee and expenses and nothing else. Three of those four calls, Rs 22,30,00,000, fall inside Years 6 to 8 and the fourth, Rs 2,20,00,000, falls at Fund II's Year 9 Quarter 1. Over the same stretch four holdings left the portfolio in full and 40 per cent of a fifth was sold, and the fund made four distributions totalling Rs 4,38,00,00,000.

Stage three is the record date at the end of Fund II's Year 9 Quarter 2. The record date falls 8.50 years after final close, 85.0 per cent of the way through a ten year term. Stage four is what the contract still provides: six quarters of term remaining, from 8.50 years to the end of Year 10. Stage five is the extensionA right to add a stated period to the term, exercisable only on conditions the documents set.. Fund II has two of them, one year each, and neither has been taken. Stage six is wind-upThe closing of the vehicle once nothing is left to realise and the last payment has gone out.. Wind-up is not a stretch of time at all but an event: the vehicle closes once nothing is left to realise and the last payment has gone out.

What does a fund look like 8.50 years into a ten year term?

Here is the honest position of Nilgiri Growth Partners Fund II, invented, at its record date, and it is worth stating plainly rather than softening. The fund has drawn Rs 4,80,00,00,000 from its investors and its manager, being 96.0 per cent of the Rs 5,00,00,00,000 committed. The fund has distributed Rs 4,38,00,00,000 back. The fund is therefore Rs 42,00,00,000 short of returning the Rs 4,80,00,00,000 it has called, at 85.0 per cent of the way through its contracted term. Five of its nine holdings have never been sold, and they are carried at Rs 2,82,00,00,000.

Both halves of that sentence matter and they pull against each other. Rs 2,82,00,00,000 is a carrying value: a number the fund reports for things nobody has bought. Rs 42,00,00,000 is a cash shortfall: an amount that has not come back. A carrying value and a cash shortfall are not the same kind of object at all, and the whole difficulty of reading a private fund in its ninth year is that a sheet of figures shows both at once without saying which is which.

The unfunded commitmentThe part of an investor's promise contracted for but not yet called. at the record date is Rs 20,00,00,000, being 4.0 per cent of Rs 5,00,00,00,000, and what remains of the promise is there for the fee and the expenses of the quarters that are left rather than for buying anything. The investment period ended four years ago on Fund II's clock, so the buying is done.

What is an extension, who grants it, and what does it change?

Extension

An extension is a right to add a stated period to the termThe contracted life of the fund, written into its own documents and counted from final close., exercisable only if a condition written into the documents is satisfied. An extension is not a period already granted, and it does not arrive because the fund needs it. Somebody has to elect to take it, somebody else has to agree, and until both of those have happened the term ends when the term ends.

Nilgiri Growth Partners Fund II, invented, has two of them, of one year each, and here is the part worth slowing down for: they are not the same right twice. The first extension is at the manager's election with the prior written consent of the investor advisory committee. The second requires the consent of investors holding more than half of commitments by value. Two different people are being asked, in two different ways, for the same twelve months.

Think of a tenant with two renewal options on a shop. The first says the tenant may renew if the landlord's building committee signs a letter. The second says the tenant may renew only if the owners of more than half the building agree. The two renewals are very different conversations. A tenant who reads the second as a formality because the first was one has misread the lease. The first door is a committee giving written consent; the second is a count of value across the whole investor body.

One more distinction, and it is the one people trip on. An extension changes when the fund must be finished. An extension does not change what the fund may do. The investment period ended at the end of Fund II's Year 5 and an extension of the term does not reopen it, so an extended fund is still a fund that may call capital only for its four permitted purposes. A longer runway to sell what is held is a different thing from a fresh mandate to buy.

How many investors does a vote by value actually need?

Here is where a phrase like more than half of commitments by value stops being words and becomes arithmetic. Fund II has twelve investors committing Rs 4,90,00,00,000 between them, and the manager commits a further Rs 10,00,00,000, making Rs 5,00,00,00,000 in all. More than half of the investors' Rs 4,90,00,00,000 and more than half of the whole Rs 5,00,00,00,000 are different numbers. The first question to ask of any consent threshold is which of the two it counts against.

Take the second extension's test as written: investors holding more than half of commitments by value. Half of Rs 4,90,00,00,000 is Rs 2,45,00,00,000, so the test needs strictly more than that. Line the twelve investors up largest first: Rs 1,00,00,00,000, Rs 80,00,00,000, Rs 75,00,00,000, Rs 60,00,00,000, Rs 50,00,00,000, Rs 40,00,00,000, Rs 25,00,00,000, Rs 20,00,00,000, Rs 15,00,00,000, Rs 10,00,00,000, Rs 10,00,00,000, Rs 5,00,00,000. The two largest hold Rs 1,80,00,00,000 between them, below the line. The three largest hold Rs 2,55,00,00,000 between them, being 52.0 per cent of the Rs 4,90,00,00,000 the investors committed and 51.0 per cent of the fund. Three investors out of twelve can satisfy that test.

Now try a harder threshold, one that appears elsewhere in this fund's own documents. The key-person provision turns on investors holding more than two thirds of commitments by value. The provision is a separate clause about what happens if the two named key persons depart, and it is covered separately. Two thirds of Rs 4,90,00,00,000 is Rs 3,26,66,66,667. The four largest investors hold Rs 3,15,00,00,000 between them, short of that figure. Five investors reach it, at Rs 3,65,00,00,000, being 74.5 per cent of the Rs 4,90,00,00,000 the investors committed and 73.0 per cent of the fund.

And here is the detail worth carrying away. The conclusion does not depend on which denominator is used. Two thirds of the whole Rs 5,00,00,00,000 is Rs 3,33,33,33,333. The four largest investors at Rs 3,15,00,00,000 do not reach that either, and five at Rs 3,65,00,00,000 clear it on both bases. The same is true of the half test: three investors clear it whether the divisor is Rs 4,90,00,00,000 or Rs 5,00,00,00,000. On a different set of commitments the denominator would decide the answer. Which case applies is not known until the sum has been done. Name the denominator every time.

Notice one further thing about door one, and it is arithmetic rather than opinion. The investor advisory committee of Fund II has seven members drawn from investors 1, 2, 3, 4, 5, 6 and 8. Add their commitments: Rs 1,00,00,00,000 plus Rs 75,00,00,000 plus Rs 80,00,00,000 plus Rs 60,00,00,000 plus Rs 50,00,00,000 plus Rs 40,00,00,000 plus Rs 20,00,00,000 is Rs 4,25,00,00,000, being 86.7 per cent of the Rs 4,90,00,00,000 the investors committed and 85.0 per cent of the fund. So the committee route is not a small-holder route on this invented fund. The committee route is a different mechanism, not a smaller one, and describing it as a lighter test would be a claim the record does not support.

Where is any of this actually written down?

All of it sits in one place, and that is the single most useful practical fact in this guide. The term, the investment period, the four things capital may still be called for afterwards, and both extensions with their two different consent tests are all clauses of the same document: the trust deed of Nilgiri Growth Partners Fund II, invented, read alongside the contribution agreement each investor signed. There is no second source. There is no convention that fills a gap the document leaves.

Which means the only way to know another fund's answer to any of these questions is to read that fund's own documents, and every figure in this guide would be a wrong answer for a different fund. Ten years is what this invented fund contracted for. Two extensions of one year each is what this invented fund contracted for. A reader who carries those numbers to a different vehicle has taken one arrangement's private contract and treated it as a fact about the world.

What does a fund look like once it has actually finished?

Nilgiri Growth Partners Fund I, invented, is the completed one. Fund I ran its full ten years, took no extension at all, and wound up at its own Year 10 Quarter 4. The fund drew Rs 2,40,00,00,000 across ten calls, being 96.0 per cent of the Rs 2,50,00,00,000 committed to it, and distributed Rs 4,80,00,00,000 back over its life. All seven of its holdings were realised, and the vehicle closed because there was nothing left in it to realise.

Put the two funds side by side and almost everything about them differs, and yet the manager is the same, the terms are the same, the preferred return is the same and the profit share is the same. Position on the clock separates them and nothing else does. A fund's stage has to be stated before any figure about it means anything. Fund I is a finished record. Fund II is a fund with six quarters of contracted term left and five holdings it has not sold, carried at Rs 2,82,00,00,000.

Two clock warnings apply wherever both funds are named. Fund I's final close falls four years before Fund II's, so Fund I's Year n is the same real moment as Fund II's Year n minus 4. Fund I's wind-up at its Year 10 Quarter 4 is therefore the same afternoon as Fund II's Year 6 Quarter 4, the quarter of Fund II's first distribution. A bare year and quarter is never safe to read where two funds are named: which clock it belongs to comes first.

There is one more thing Fund I teaches about formation, and it is uncomfortable rather than flattering. Fund II's final close falls at the start of Fund I's fifth year. Work through Fund I's numbered calls to that point: Rs 10,00,00,000 plus Rs 40,00,00,000 plus Rs 50,00,00,000 plus Rs 45,00,00,000 plus Rs 40,00,00,000 plus Rs 35,00,00,000 is Rs 2,20,00,00,000 across six of its eventual ten calls. And Fund I had distributed nothing at all by then. Its first distribution came at its own Year 6 Quarter 2, on Fund II's clock the Year 2 Quarter 2, more than a year after Fund II had closed and begun drawing. So Fund II was formed against a track record that was entirely unrealised, and that is not an irregularity: it is the ordinary consequence of a ten year fund raising a successor in its fifth year. The useful response to it is a question about what the unrealised figures rest on, not a verdict.

Who actually needs to know when a fund's term ends?

Four different people read this clock for four different reasons, and none of them is doing it out of curiosity.

The investor with a promise outstanding reads it first. Investor 1 of Fund II, invented, committed Rs 1,00,00,00,000 and has paid in Rs 96,00,00,000, so it holds Rs 4,00,00,000 of unfunded commitment: 100 less 96, taken from its own commitment and not from the fund's Rs 20,00,00,000. The Rs 4,00,00,000 is a liability that has to stay available, and how long it has to stay available is a question the term answers and nothing else does.

The person putting a value on a stake in the fund reads it second. Rs 2,82,00,00,000 sits in five holdings nobody has bought, and how long the fund has left to work on them is one of the plain facts wanted before doing anything with that number. The value of such a stake, and what a buyer of one pays for it, are covered separately.

The manager's own operations team reads it third. A term end is a working deadline with tasks hanging off it, and Farida Contractor, invented, as chief operating officer, signs the notices that go out under it.

And an analyst comparing two funds reads it fourth, to avoid the most common comparison error there is. Comparing a fund at 8.50 years with a fund at 3.00 years and treating the difference in their figures as a difference in their quality is comparing two positions on a clock and calling it a judgement. The stage has to be stated first, and once it is stated, half the apparent difference usually turns out to be the clock.

Where do the conditions attaching to a registered fund come from?

Everything in this guide so far is contract: two invented funds and the private documents their parties signed. There is a second layer, and it is not contract. Nilgiri Growth Partners Fund II, invented, is registered as an Alternative Investment Fund, and the conditions attaching to a registered vehicle of that kind come from the Securities and Exchange Board of India at sebi.gov.in.

Categories, registration, reporting and conduct for Alternative Investment Funds are set by that regulator, those conditions change, and the current text at sebi.gov.in is the only text worth relying on. A plausible wrong threshold repeated confidently is far more damaging than an honest gap. Anything about a portfolio company's own board, its charges or its filings sits with the Ministry of Corporate Affairs at mca.gov.in.