Fund Term: The Contracted Life of a Private Fund

A fund term is the contracted life of a private fund, counted from its own final close and written into its own documents. Nilgiri Growth Partners Fund II, invented, has a ten year term ending at the end of its Year 10. At its record date, 8.50 years in, six quarters remain, five holdings are unsold and Rs 2,82,00,00,000 of the fund's value has never been sold to anybody.

Begin with something easy to picture. A neighbourhood association books a community hall for a wedding from six in the evening until midnight. The hall has a hard closing time written on the booking slip. Nothing about that closing time says the food will be finished, the photographs will be done or the guests will have left. The closing time says one thing only: at midnight this booking ends, and everything still going on has to be somewhere else. A fund term is that closing time, written into a contract, for a pool of money that has bought companies nobody can sell on demand. The clock is fixed in advance and the things it is trying to finish are not.

Almost everything difficult about a closed-end private fund falls out of that one collision. The collision between a fixed clock and unfinished business sorts a private fund's problems into problems of time and problems of value.

What is a fund term, and what exactly is it counting?

A fund termThe contracted life of the fund, counted from its own final close. is the period the fund's own documents give the vehicle to exist. The term is a number in a contract, negotiated between a manager and the investors who put money in, and fixed before a single rupee is called or a single company is bought. The number does not renew, it does not roll and it is not reviewed each year. From day one it simply counts down.

The final close is the day the vehicle stops accepting new investors and becomes a settled group of committed money. The counting starts there. Every date below is measured from that day. Writing a date as Year 4 Q2, meaning the second quarter of the fourth year after final close, is a convention of this subject rather than a law of nature, and for arithmetic Year n Q m sits at n minus 1, plus 0.25 times m, years after the close. So a fund's Year 1 Q1 is 0.25 years in and its own Year 10 Q4 is 10.00 years in. The final close itself, and why the clock starts there rather than at first close, is covered separately.

Nilgiri Growth Partners Fund II is the worked case throughout. The fund is managed by Nilgiri Alternatives Advisors Private Limited, invented, settled as a trust with Nilgiri Trusteeship Services Private Limited, invented, as trustee, and stood behind by Nilgiri Financial Holdings Private Limited, invented, as sponsor. In this structure the role that the imported vocabulary of this subject calls the general partner is discharged by the manager and the trustee between them, and the contract is a trust deed and a contribution agreement rather than a partnership agreement. The naming matters for one reason only: the term is a clause in those documents, and those documents have to be read to know what any particular fund's term is.

Fund II's term is ten years from its final close, ending at the end of its Year 10. Its investment period is five years from the same day. Both numbers came out of a negotiation before the fund existed, and neither of them came from anywhere else.

What is the term a deadline for?

For the vehicle to be finished. The answer is that short, and shorter than most readers expect. At the end of the term the fund is meant to have realised what it holds, paid out what it owes, settled its accounts and closed. The word for that closing is wind-upThe closing of the vehicle once nothing is left to realise and the last payment is made., and a wind-up is an event about the vehicle, not about any company inside it.

Go back to the community hall. The booking's closing time obliges the hosts to be out. The closing time does not oblige any particular guest to leave at any particular moment, and it certainly does not oblige the caterer to have sold the leftover food at a good price. The obligation attaches to the whole event, and the individual bits have to be arranged around it by the people running the evening.

A fund term works the same way. The term attaches to the vehicle. Fund II has nine holdings, numbered 1 to 9 in its own records, and not one of those nine has a contractual obligation to be sold by any date at all. The companies do not know the fund has a term. Each has its own board, its own budget and its own buyers or lack of them. The term binds the pool, and the pool then has to do something about the things it holds. That asymmetry, between an obligation on the vehicle and no obligation at all on the assets, is where the pressure described here actually comes from.

What is the term not a deadline for?

Three things, and a reader who has all three straight will misread far less of what a private fund publishes. The term says nothing about what anything is worth, nothing about when or whether any individual position sells, and nothing about whether the figures on the report ever turn into money. Take them in order.

First, value. At the record date Fund II holds five positions it has not sold: holdings 4, 6, 7, 8 and the remaining 60 per cent of holding 9. Each is an unrealised holdingA position the fund still holds, carried at an estimate rather than a price paid., meaning a position carried at a considered estimate rather than at a price anybody actually paid. Together they carry Rs 2,82,00,00,000, and that total is the fund's residual valueThe total carrying value of everything the fund still holds.. Nothing in the term clause touches that number. The term will end on the day it ends whether the estimate turns out to have been generous, mean or exactly right, and the estimate itself is struck by machinery covered separately.

Second, timing of any individual sale. Fund II's nine positions left, or did not leave, on their own schedules. Holding 2 went at Fund II's Year 6 Q3. Holding 5 was written off in full at Fund II's Year 6 Q4 and produced nothing at all. Holding 1 went at Fund II's Year 7 Q2 and produced Rs 2,03,00,00,000. Holding 3 went at Fund II's Year 8 Q1 for Rs 1,50,00,00,000. Forty per cent of holding 9 went at Fund II's Year 8 Q3 for Rs 22,00,00,000, and the other 60 per cent is still held. Which route each of those took out of the portfolio is covered separately. Not one of those dates was chosen by the term clause, and the term clause could not have forced any of them.

Third, whether reported figures become cash. The third is the one that costs people money, and the failure below turns on it. For now, hold the shape: a fund's stated value at any date is part cash already received and part estimate, and a contractual end date does not convert the second part into the first.

How far through is this fund, and how would that even be measured?

Here is a question that sounds like it has one answer and has at least four. At its record date, the end of its Year 9 Q2, how far through is Nilgiri Growth Partners Fund II? A colleague asks it in a corridor, with the fund's own record to hand. Every honest answer is different from every other one.

By time, 8.50 of 10.00 contracted years have run, so 85.0 per cent of the term is behind it and 15.0 per cent is ahead. By count, four of its nine holdings are gone entirely and five are still held, so 44.4 per cent of the positions are finished and 55.6 per cent are not. By cost, Rs 2,20,00,00,000 of the Rs 4,00,00,00,000 the fund ever invested has been released by realisation and Rs 1,80,00,00,000 is still out, so 55.0 per cent is finished and 45.0 per cent is not. By value, Rs 4,38,00,00,000 of the Rs 7,20,00,00,000 of total valueCash already distributed plus the carrying value of what is still held. has been realised and Rs 2,82,00,00,000 has not, so 60.8 per cent is finished and 39.2 per cent is not.

Four measures, one fund, one day, and the finished share reads 85.0, 44.4, 55.0 and 60.8 per cent depending only on what was counted. Read the same four as what is still to come and they read 15.0, 55.6, 45.0 and 39.2 per cent. Every one of those eight figures is arithmetically correct and comes straight off this invented fund's own record.

The record has a trap in the counting, worth clearing before the picture. Four holdings are gone entirely, being 1, 2 and 3 sold and 5 written off. Five are still held, being 4, 6, 7, 8 and 9. Four plus five is nine, the whole portfolio. Holding 9 was 40 per cent realised and the fund still holds the other 60 per cent, so there are five exit events across five holdings. Holding 9 is the only position that sits on both sides of that line, and a sentence saying five sold and five still held would describe ten positions in a portfolio of nine.

Why do four honest measures disagree by so much?

Because only one of them is a clock. Time runs at a fixed rate whatever anybody does. Time took no view, it made no decision and it will reach 100 per cent on the day the contract said it would. The other three measure work that has actually been completed, and completed work arrives in irregular lumps whenever a buyer turns up, whenever a board agrees, whenever a process finishes.

Think about a household building a two-storey house with a bank loan whose term is fixed. Twenty of the twenty-four loan months have gone. Twenty months of twenty-four does not mean five sixths of the house exists. The ground floor might be finished and the first floor might be four walls and no roof, and nobody would confuse the loan's calendar with the building's progress. The elapsed termHow much of the contracted life has run, expressed against the whole of it. measures the contract; the other three measure the work, and a fund in its late years is exactly a household with a fixed loan term and an unfinished first floor.

There is a second reason the three work-measures disagree with each other, and it is worth naming because it is the same reason everywhere in this subject. The three have different denominators. Count treats a Rs 25,00,00,000 position and a Rs 70,00,00,000 position as one thing each. Cost weighs each position by what the fund paid for it. Value weighs each position by what it is now reckoned to be worth, and for the unsold ones that reckoning is an estimate. So the three answer three different questions: how many decisions are behind the fund, how much of what it spent has come back into play, and how much of what it says it is worth has actually been proved.

Which one should a reader ask for? All of them, and any report that offers only one deserves suspicion. Where only one is available, take the value measure, then ask at once how much of the numerator is cash and how much is an estimate. The other three cannot answer that question at all. None of the four is the right measure: each answers a different question, and the reader's own question decides.

What pressure does a running clock put on unsold value?

Now put the two lines side by side and watch them come apart. One line is the share of the contracted term that has run. Time runs straight, so that line runs straight. The second line is the share of total value that has actually been realised. Realisations happen when they happen and not otherwise, so the second line is a staircase.

Fund II's staircase has five steps in it, and two of them are worth pausing on. The first step arrives at Fund II's Year 6 Q3, five and three quarter years in, when holding 2 produced Rs 63,00,00,000 and took the realised share of total value from nothing to 8.8 per cent. Read that again: for the first five and three quarter years of a ten year term, this fund had realised nothing at all. The second is at Fund II's Year 6 Q4, when holding 5 was written off in full. A write-off is a position leaving the portfolio without producing any cash, so the write-off changes the count and moves the staircase not one millimetre.

Then the steps come quickly. Holding 1 at Fund II's Year 7 Q2 lifts the line to 36.9 per cent. Holding 3 at Fund II's Year 8 Q1 lifts it to 57.8 per cent. The partial sale of holding 9 at Fund II's Year 8 Q3 lifts it to 60.8 per cent, and there it stops. Nothing has been realised in the three quarters since. At the record date the time line stands at 85.0 per cent and the value line stands at 60.8 per cent, and those 24.2 points of separation are the pressure.

In practice the pressure is not panic and not drama. The pressure is a manager with five positions, a set of boards to persuade, a set of processes that take the time they take, and a date after which the vehicle is supposed not to exist. Every one of the five could be sold sooner at a lower number or later at a number nobody can know. The choice is a genuinely hard problem with no arithmetic answer. The documents deal with it by naming a date rather than by promising an outcome.

Two things a manager could do about it are worth naming. One is a continuation vehicle, where a holding is moved into a new vehicle that buys it from the existing fund, with the existing investors offered the choice of cash or of rolling in. The other is a loan taken against the remaining holdings taken together, with the proceeds distributed. Both are labelled counterfactuals in this record: neither has been done by Nilgiri Growth Partners Fund II, both carry consequences that need working through properly, and both are covered separately where that work is done.

Can something the fund holds outlive the fund itself?

An asset can, and there is a clean case inside this same platform. Nilgiri Real Assets Fund I, invented, holds an operating solar generation asset that sells its output under a long contract. At the record date that contract has fifteen years still to run. The Real Assets fund's own documents give it a ten year term and two further extensions of one year each, so the very longest it can exist is twelve years from its own final close.

Fifteen years of contract against twelve years of vehicle, at the absolute most, leaves a gap of at least three years against that twelve year maximum. The base has to be stated every time. Measured against the ten year base term alone the same gap would be at least five years, and five is not a floor the record can hold while those extensions still exist. The safe statement is the smaller one with its base attached.

What did the term do to the fee?

Nothing directly, and that is the interesting part. Something else in the same set of documents did a great deal, and readers routinely credit it to the term or to a renegotiation, when in fact it was written down before the fund opened.

Fund II's management fee is 2.00 per cent a year. The rate is the same in the fund's Year 1 and in its Year 9. The fee basisThe amount the fee rate is applied to, which can change on a date the documents name. is the amount the rate is applied to, and the basis is what moves. During the five year investment period the basis is aggregate investor commitments of Rs 4,90,00,00,000, and 2.00 per cent of that is Rs 9,80,00,000 a year. From Year 6 the basis becomes the acquisition cost of holdings not yet realised, measured at the start of each year. By the start of Fund II's Year 9, holdings 1, 2, 3 and 5 have gone and 40 per cent of holding 9's cost has been released, so the remaining cost is Rs 1,80,00,00,000, and 2.00 per cent of that is Rs 3,60,00,000 for the year.

The annual charge falls from Rs 9,80,00,000 to Rs 3,60,00,000, or 36.7 per cent of what it was, and not one term was renegotiated to get there. The basis changed on the day the contract always said it would, and it kept changing every year afterwards as positions left the portfolio. The investment period and the harvest period, and why the basis steps at that boundary, are covered separately and used here without being re-explained.

There is a household version of this and it is worth having. A caretaker is paid a fixed percentage of the value of the rooms actually being looked after. In the first years that is the whole building, so the bill is large. As rooms are let out permanently and pass off the list, the bill shrinks, at exactly the same percentage. Nobody renegotiated the caretaker's rate and nobody argued. The list simply got shorter.

What does a completed term actually look like?

Everything so far has been a fund in the middle of things. Seeing one that finished helps enormously, and this platform has exactly one. Nilgiri Growth Partners Fund I, invented, is wound up.

Before the figures, the clocks. Two funds run on two clocks four years apart. Fund I's final close is 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 wound up at its own Year 10 Q4, the same afternoon as Fund II's Year 6 Q4, the quarter in which holding 5 was written off. The two clocks are four years apart, so every date carries the name of the fund it belongs to and a bare quarter belongs to neither.

Fund I had commitments of Rs 2,50,00,00,000 across nine investors, a ten year term on the same shape of documents as Fund II, and it took neither of its extensions. Fund I drew Rs 2,40,00,00,000, being 96.0 per cent of what was committed, of which Rs 2,00,00,00,000 was invested and Rs 40,00,00,000 was fee and expenses. The fund held seven positions and realised all seven. Their proceeds were Rs 96,00,00,000, Rs 60,00,00,000, Rs 1,00,00,00,000, nothing at all on one that was written off, Rs 63,00,00,000, Rs 21,00,00,000 and Rs 1,40,00,00,000, summing to Rs 4,80,00,00,000 distributed against Rs 2,40,00,00,000 drawn over that fund's own ten years.

A finished term has a particular arithmetic shape. There is no residual value line. There is no carrying value anybody has to trust. The last thing a fund does before winding up is turn the last estimate into either cash or nothing, so every rupee in the total is a rupee somebody paid. Fund I's record also shows how uneven the road there was: one of its seven produced Rs 1,40,00,00,000, being 29.2 per cent of everything Nilgiri Growth Partners Fund I ever distributed over its own ten years, and two of the seven returned less than they cost. None of that is a verdict on the fund. The spread is what the arithmetic did over that fund's own ten years, and one fund's arithmetic is not a pattern.

Does the end of the term settle what the fund is worth?

Where does the ten years actually come from?

From this fund's own documents, and from nowhere else. The source is worth being slow and exact about.

The term sits in the same clause set as three other things, and treating the four as one idea rather than four is what makes a private fund's timing readable. First, the term itself: ten years from final close for Fund II. Second, the investment period: five years from the same day, after which capital may be called for four things only, being a follow-on into something already held, the management fee, fund expenses, and obligations already signed for. Third, the extensionA right to add a stated period to the term on conditions the documents set. rights: Fund II's documents carry two extensions of one year each. The first 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. Neither has been taken at the record date. An extension, how it is exercised and what happens when a fund overruns are covered separately, under the whole arc of a fund's life.

One clarification while the investor advisory committee is on the table. The mix-up that follows is the single most common in this subject. The investor advisory committee consents on conflicts, on valuation policy, on the first extension and on any change to the investment policy. The committee does not approve investments and it cannot reject one. Approving investments is the job of the investment committee, a different body with a different job, and both are covered separately. A reader who swaps the two will misread every governance sentence they meet afterwards.

Fourth and last, the fee basis step-down set out above, keyed to the same start date. All four are counted from the final close. None of them is reviewed annually. None of them arrives from outside the documents.

What is worth asking a fund in its ninth year?

Far more people read a private fund's report than ever negotiate one. Reading one well is the practical end of the matter. Suppose a member of an institution's private markets team, or the analyst preparing a portfolio review, has a fund like this one on the agenda. Four questions, in this order, get further than any amount of staring at a multiple.

Ask first how far through it is, and on which measure. If the answer is a single number, ask for the other three. For Nilgiri Growth Partners Fund II at its record date the four readings run from 44.4 to 85.0 per cent finished, and the spread of 40.6 points is itself the useful information: this is a fund whose calendar has moved much faster than its realisations. The distance between the time reading and the value reading is the single most informative number in a fund's report, and almost nobody prints it.

Ask second what share of the reported value is cash and what share is an estimate. For this fund it is Rs 4,38,00,00,000 against Rs 2,82,00,00,000, being 60.8 per cent and 39.2 per cent of total value. Ask third what is left, position by position, and how long each has been held. Five positions and six quarters is a different problem from one position and six quarters. Ask fourth what the documents say happens next, and read the clause rather than accepting a summary of it. The extension rights and the consents attaching to them are exactly the part people describe loosely.

For a lender, the same reading does a different job. A lender looking at a vehicle in its late years is not asking whether the mark is right; it is asking when cash could arrive and from what. A fund with 85.0 per cent of its term gone and five unsold positions has a repayment story that depends entirely on events nobody has scheduled, and that is a fact about the structure rather than a criticism of it. For a household, the transferable idea is smaller and more useful than any of this: whenever somebody states how far along something is, the question to put back is what they counted. The wedding hall booking is 85 per cent gone. The booking says nothing about whether dinner has been served.