Fundraising: From First Pitch to First Close to Final Close

Fundraising is the sale of a promise. A manager sets out what it intends to do, what it will charge and what protections investors get, and investors sign contracts committing capital they have not yet paid. Nilgiri Growth Partners Fund II, invented, closed on Rs 5,00,00,00,000 of commitments, being Rs 4,90,00,00,000 across twelve investors and Rs 10,00,00,000 from the manager itself.

One sentence has to come first, and it is the sentence most readers skip past because it sounds like a technicality. Raising a private fund is not one event with a date on it. A raise is a sequence of closes, and different investors join at different moments while ending up on exactly the same terms. The word people reach for is launch, as though a fund appears on a particular morning the way a shop opens its shutter. The picture of a launch morning misleads at every step that follows, hiding what a close actually is and what changes the moment one happens.

What is a manager actually asking investors for when it raises a private fund?

Start with something ordinary. A woman runs a tiffin service out of one kitchen and wants to run four. She has no second kitchen, no second cook and no second delivery round. She has an idea of the streets she would serve, a view on what the rent and the staff would cost, and a track of five years of doing it once. She goes around to thirteen people she knows and asks each of them, not for money today, but for a promise: if she finds the right kitchen, each will put in what they said they would, within ten days of her asking. Nobody hands over a rupee at that conversation. Everybody signs something.

The tiffin arrangement is the whole of a private fund's fundraising, at a much larger scale, written down properly and with real consequences attached to the signature. Nothing is bought at a fundraising and nothing is sold. A set of contractual promises changes hands, pointing in two directions. The investor promises capital on notice. The manager promises a strategy, a fee basis, a term, a set of protections and a governance structure it will run the money inside.

The investor's side of that is called a commitmentA contractual promise of capital, payable when the manager calls it.: a contractual promise of a stated amount, payable when the manager asks for it and not before. The manager's side is set out in a placement memorandumThe document setting out what the fund intends to do and on what terms.. The memorandum describes what the fund intends to do and on what terms, and it sits alongside the contract each investor actually signs. The contents of those documents, the working of a capital call and the keeping of a capital account are all treated separately and are used here rather than explained.

A private fund differs sharply from the way most readers have met a pooled investment before. Money put into a fund whose units are quoted buys units the same day, and those units are priced off things the fund has already bought. There is a portfolio before the investor arrives. Here there is nothing before the investor arrives. There is a person, a proposition, a set of terms and a signature block. Every figure any investor will ever read on a capital account statement is downstream of terms fixed at this stage, before a single holding existed.

A fundraise feels like the sort of thing that must be governed by a rule, so it is the one moment in a fund's life where a reader is most tempted to reach for one. Registration of a fund of this kind in India, and the conditions attaching to it, are set by the Securities and Exchange Board of India at sebi.gov.in, and they change. The arrangements below are what one invented fund's own documents happen to carry.

What does a manager do in the stretch before there is any fund at all?

Before the first close there is no fund. There is no clock, no capital, no holding, no net asset value and nothing to report. The stretch is long, and it produces no figure that ever appears anywhere afterwards. Ask an investor what a manager's fund did in its raise and the honest answer is that a raise leaves no trace in any number the fund later publishes. Only the terms survive.

A set of parties and a proposition is all that exists in that stretch. In the invented arrangement used throughout this guide, the parties are these. Nilgiri Alternatives Advisors Private Limited, invented, is the investment manager: it makes the investment decisions and is paid the management fee and the carried interest. Nilgiri Financial Holdings Private Limited, invented, is the sponsor, standing behind the manager and holding the manager's own commitment. Nilgiri Trusteeship Services Private Limited, invented, is the trustee. The trustee holds the assets and has duties to the beneficiaries.

The trustee's name says something about the legal shape, and the shape explains a vocabulary clash that appears everywhere in this subject. An indenture of trust is the form an Indian pooled private vehicle most commonly takes, and each of these invented vehicles is settled as a trust under one. There is no limited partnership here and there is no general partner as a matter of law; the general partner's role is discharged by the manager and the trustee between them, and the contract an investor signs is a trust deed and a contribution agreement rather than a partnership agreement. And yet the whole imported vocabulary of limited partners, general partners, capital accounts and carried interest is exactly what these documents and these investors actually use. The economics were designed in that form and carried across. Both vocabularies are correct about different things, and a reader who insists on only one of them will misread half of what is in front of them.

The manager takes four things out into that stretch. The proposition, meaning what kind of business it intends to buy and what it intends to do with it. The terms, meaning the fee basis, the term, the preferred return, the carried interest and the protections, all of which are treated separately and used here. The people. A private fund is an arrangement in which a small number of named individuals make every decision: at Nilgiri Growth Partners Fund II, invented, the two key persons are Sundari Raghavan and Devendra Karnik, and the fund's documents carry a key-person provision built around exactly those two names. And the track recordWhat the manager's earlier funds have done, which may be realised, unrealised or both., meaning what the manager's earlier funds have done so far. The last of those four turns out to be the most interesting of them.

The stretch ends at a close. So the next question is what a close actually is, and the answer is narrower and more useful than the atmosphere around the word suggests.

What is a first close, and what does it let the fund begin doing?

First Close: The Point the Fund Can Begin

Here is the definition to hold on to, and it is deliberately dry. A close is the point at which a set of investors becomes contractually committed. Before that point a signature is a discussion and an indication is an intention. At that point it is an obligation: those investors owe the fund their stated amounts whenever the manager asks, on the notice the documents set, and they cannot walk away because they have changed their mind about the strategy.

A first closeThe point at which enough commitments are signed for the fund to begin. is simply the first time that happens in a given raise. Its whole significance is a matter of permissions rather than atmosphere, so it is worth listing what actually changes, in the language of what somebody is now allowed to do.

At a first close, four things become possible that were not possible the day before. The fund exists as a pool with committed capital standing behind it. The manager may issue a capital call to the investors who have closed, and they are obliged to fund it. The manager may complete an investment, the practical point of the whole exercise. A seller negotiating with a fund that cannot yet pay is negotiating with nobody. And the fund begins incurring the costs of being a fund, and somebody now has to bear them.

Three things do not change. The offer stays open, so the manager keeps meeting investors. The target is not reached, so the fund is smaller than it intends to be and may make its early investments knowing more money is coming. And in the arrangement used here, no period the fund is measured against has started. Every date at Nilgiri Growth Partners Fund II is counted from its final close and not from any earlier one.

Think of the shopkeeper again. A first close is the morning she has enough signed to take the lease on kitchen number two and start cooking, and she is still walking around with the folder asking about kitchens three and four. She is trading. She is also still raising. Both at once, and neither cancels the other.

One caution before the mechanism, and it is the sort of thing that gets quietly invented. Some funds hold one close only, in which case the first close and the final close are the same afternoon and nothing on the next few paragraphs applies. Others hold several. Nilgiri Growth Partners Fund II's own record fixes its final close and counts every date from it. Its record fixes no date for any earlier close, so this fund's first close cannot be dated at all. The record does fix the outcome, and the outcome is what matters.

Why does an investor joining at a later close pay something extra?

Equalisation: How a Later Investor Is Brought Level

Now the one real piece of machinery in the mechanism. If a fund can hold a first close, start calling capital and start buying things, and can then admit more investors months afterwards, an obvious problem sits in the middle of it. The people who joined at the first close have had their money called and put to work. The person joining in the third close has had that same money sitting in her own account earning whatever it earned, and now wants an equal share of a portfolio somebody else paid for.

Bring it down to a smaller scale. Four neighbours set up a shared kitchen in January. The four buy a fridge, pay a deposit on the gas connection and put down two months of rent. In June a fifth neighbour asks to join on identical terms. There are two separate things she has to make good, and confusing them is where people go wrong. First, she has to pay her share of the fridge, the deposit and the rent already spent. Otherwise she is getting a fifth of things she contributed nothing towards. Second, there is the plain fact that the other four have had money out of their pockets since January while hers stayed in her pocket until June.

EqualisationThe mechanism bringing a later investor level with one who joined at the first close. is the machinery that settles both of those at once. An investor admitted at a later close contributes its full pro rata share of everything the fund has already drawn, exactly as if it had been in from the first close, and it contributes a charge on that amount at a rate the fund's own documents fix. The purpose is not to penalise anybody and not to reward anybody: it is to make sure that no investor is advantaged or disadvantaged by the date on which it happened to sign.

Two details are worth pinning down, and both are places where readers guess. The first is where the charge goes. The charge may be paid across to the investors who joined earlier, or it may go into the fund itself, and the fund's own documents fix which. Different funds fix it differently, and there is no norm. The second concerns three things the charge is not. A charge of this kind is not interest income the way a deposit pays interest, it is not a fee to the manager, and it is not a penalty for arriving late. A levelling payment calculated at a rate is still a levelling payment, and the rate does not turn it into a return on anything.

The thing this record genuinely does fix lies elsewhere. Nilgiri Growth Partners Fund II, invented, fixes no equalisation rate, no earlier close date and no later subscription amount anywhere in its record, so no rupee figure for an equalisation payment can be derived from anything here. The record does fix the state that equalisation is designed to produce. Every one of its twelve investors is drawn strictly pro rata, and at the record date at the end of Fund II's Year 9 Q2, every single one of them has paid in 96.0 per cent of its own commitment. Not roughly. Exactly the same percentage, from the largest to the smallest. A flat, uniform 96.0 per cent across twelve very differently sized investors is what "level" looks like on a statement.

What does the final close end, and what does it start?

The final closeThe day the offer shuts, after which no further commitment is accepted. is the day the offer shuts. After it no further commitment is accepted, so the size of the fund stops being a moving figure and becomes a fact. For Nilgiri Growth Partners Fund II, invented, that fact is Rs 5,00,00,00,000 of total commitments and it never changes again.

Shutting the offer is the ending half. The starting half is bigger, and it turns on a single day. The final close is the point from which every period the fund is measured against begins to run. At Nilgiri Growth Partners Fund II the term is ten years from final close, ending at the end of its Year 10. The investment period is five years from final close, ending at the end of its Year 5. The two possible one-year extensions are measured from the end of that term. Every performance date, every year end, every quarter the fund reports on is counted from that same morning.

The counting convention that follows from it recurs throughout this subject, so it is worth stating plainly. Year 1 is the twelve months beginning at final close. Each year has quarters Q1 to Q4. A date is written as Year 4 Q2 and never any other way, always with the name of the fund whose clock it belongs to in front of it wherever more than one fund is on the table, and there is no calendar year anywhere: the fund's own clock is the only clock.

Which produces a trap the moment two funds are on the table at once, and two funds are exactly what the last part of this guide requires. Nilgiri Growth Partners Fund I, invented, and Nilgiri Growth Partners Fund II, invented, have different clocks, and the reason is that they had different final closes. 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, and Fund I's wind-up at its Year 10 Q4 is the same afternoon as Fund II's Year 6 Q4. Every date therefore carries the name of the fund it belongs to, and a bare year and quarter would be a reconciliation fault rather than a matter of style.

The mechanics of the final close itself, and what the fund term then does across the ten years that follow, are both covered separately.

What did Nilgiri Growth Partners Fund II actually raise, and from whom?

Here is the whole result of one invented raise, and the first thing to notice is that it has thirteen lines in it and not twelve. Twelve investors committed Rs 4,90,00,00,000 between them. The manager, Nilgiri Alternatives Advisors Private Limited, invented, committed a further Rs 10,00,00,000 of its own money. Added together they come to Rs 5,00,00,00,000 of total commitments. The manager is the thirteenth party at the table rather than one of the twelve, and a share of investor commitments and a share of total commitments are two different numbers that a careless sentence will merge into one.

The addition is worth running, because a reader who checks one total reads every later figure differently. In crore: 100 plus 75 plus 80 plus 60 plus 50 plus 40 plus 25 plus 20 plus 15 plus 10 plus 10 plus 5 is 490. With the manager's 10 that is 500. The percentage column in the table uses Rs 5,00,00,00,000 as its denominator throughout, and so it sums to exactly 100.0 with no rounding left over.

Now change the denominator and watch what happens to a number that has not moved. Investor 1's commitment of Rs 1,00,00,00,000 is 20.0 per cent of the Rs 5,00,00,00,000 of total commitments. The very same commitment is 20.4 per cent of the Rs 4,90,00,00,000 committed by the twelve investors. Neither figure is wrong and neither is a rounding of the other. The two percentages answer different questions, and a sentence that says investor 1 holds twenty per cent of the fund without saying twenty per cent of what has said something a reader cannot check.

The concentration in that picture is the second thing worth pulling out, and it needs handling carefully because it is very easy to turn into a verdict. The four largest commitments are investor 1's Rs 1,00,00,00,000, investor 3's Rs 80,00,00,000, investor 2's Rs 75,00,00,000 and investor 4's Rs 60,00,00,000. Add them: Rs 3,15,00,00,000. Against total commitments of Rs 5,00,00,00,000 that is 63.0 per cent, and against the twelve investors' Rs 4,90,00,00,000 it is 64.3 per cent.

The consequence is arithmetic and nothing more. Fund II's own documents provide that a second extension of its term requires the consent of investors holding more than half of commitments by value. On either denominator this record supports, those four names clear more than half between them. So a consent measured by value at this fund is, in practice, a conversation with a small number of signatories. The concentration is a description of how the arithmetic falls out, not a criticism of anybody and not a claim about what any fund's investor list ought to look like.

The same shape appears closer to home. A housing society of thirteen flats where four of them paid 63 paise of every rupee that went into the new lift is not doing anything improper. But when the society votes by value, those four decide. The interesting question is never whether concentration exists; it is which decisions are measured by value and which by head count. Those two produce different answers in the same room.

One last figure from this list, and it is the one this subject gets wrong most often. At the record date at the end of Fund II's Year 9 Q2, the fund had drawn Rs 4,80,00,00,000 of its Rs 5,00,00,00,000, so the fund's own unfunded commitment is Rs 20,00,00,000, being 500 less 480 at the level of the whole fund. Investor 1's unfunded commitment is not that number. Investor 1 committed Rs 1,00,00,00,000 and has paid in 96.0 per cent of it, being Rs 96,00,00,000, so its own unfunded commitment is Rs 4,00,00,000, being 100 less 96 at the level of one investor. The two figures are five times apart and they describe different parties. Whenever either one is written down, the level belongs in the same sentence.

Why does the manager put its own money in, and what does that prove?

The thirteenth line of that list deserves its own treatment. The manager commitmentThe manager's own money in its own fund, on the same terms as an investor. at Nilgiri Growth Partners Fund II, invented, is Rs 10,00,00,000, exactly 2.0 per cent of the Rs 5,00,00,00,000 of total commitments. The manager's commitment is funded in cash, not set off against fees, and it takes the same treatment as an investor interest in every part of the fund's economics. A manager charging itself a fee would be moving money from one of its pockets to the other, so the commitment bears no management fee.

Say the arithmetic out loud in the other direction. The ratio is the part that sticks. For every one rupee the manager put in, the twelve investors put in forty-nine. Forty-nine to one is what Rs 4,90,00,00,000 against Rs 10,00,00,000 means. The manager's stake is a real amount of somebody's own money and a small fraction of the pool, and both halves of that sentence are true at once.

The commitment puts the manager on the same side of the same outcome as the investors, in cash, for the whole life of the fund. If the holdings do badly, the manager's own Rs 10,00,00,000 does badly with everybody else's, and it cannot be quietly withdrawn when the news turns. The everyday version is the contractor who moves into a flat in the building he put up. Not because it makes him a better builder, but because he now lives with the plumbing.

And here is the part that gets overclaimed constantly, so exactness matters. A manager's own commitment aligns an outcome; it does not evidence a capability. A commitment says nothing about judgement, nothing about whether the strategy is sound, and nothing about what this or any fund will do. A person can put real money behind a decision and still be wrong about it, and being wrong is the ordinary human condition rather than a special hazard of private funds. No conclusion follows from the size of that Rs 10,00,00,000, and it is neither approved nor criticised here.

The last thing to say is a boundary. Whether a manager of a fund of this category in India must contribute anything at all, and how much, is set by the Securities and Exchange Board of India at sebi.gov.in. The 2.0 per cent above is this invented fund's own arrangement, written into its own documents, and the regulator's conditions on the point change.

What is a side letter, and what is the one question worth asking about any of them?

A side letterA separate agreement giving one investor a term the main documents do not. is a separate agreement between the fund and one investor, giving that investor a term the main documents do not give everybody. Side letters are ordinary, they are negotiated during the raise, and they are one of the reasons a raise is a sequence of conversations rather than a single price list. Nilgiri Growth Partners Fund II, invented, carries six of them, and what they contain is worth one paragraph each at most. The mechanics of side letters as instruments are treated separately.

Side letter 1 gives investor 1 a seat on the investor advisory committee and a most-favoured-nation right to elect into any term given to a later investor of the same size or smaller. Side letter 2 gives investor 3 an excuse right, letting it be left out of any investment in a sector its own mandate excludes, along with additional reporting on a timetable of its own. Side letter 3 gives investor 4 a confirmation about regulatory capital reporting and a right to transfer its interest to any entity under the same control. Side letter 4 gives investor 5 a most-favoured-nation right and a co-investment right of first look. Side letter 5 gives investor 8 notification if the manager's team composition changes, sitting alongside and not replacing the key-person provision. Side letter 6 provides that investor 12, the co-investment vehicle for the manager's own senior staff, pays no management fee and no carried interest.

Six letters, and now the question. A reader is tempted to rank those concessions by size, as though the biggest one is the one to worry about. Size is the wrong axis entirely. The question about any side letter is not how large the concession is but who bears its cost.

Side letter 6 is the clearest case in this invented fund, and it is clear precisely because the answer is written down. Investor 12 pays no management fee and no carried interest, and the manager bears that cost out of its own fee rather than the fund rebating it. Bearing the cost out of its own fee is exactly why this fund's fee base is still the full Rs 4,90,00,00,000 of investor commitments, and why not one of the six side letters moves the fee arithmetic that runs through the rest of this fund's life.

Now a counterfactual, and it is labelled a counterfactual because it did not happen. Suppose side letter 1 had instead cut investor 1's management fee by 25 basis points. Investor 1 committed Rs 1,00,00,00,000, and 25 basis points of that is Rs 25,00,000 a year. The fund's annual management fee during its investment period is Rs 9,80,00,000, being 2.00 per cent of the Rs 4,90,00,00,000 of investor commitments, so Rs 25,00,000 is 2.6 per cent of it. Rs 25,00,000 is a small number. And the small number is not the point.

The two panels read across, row by row, put the whole lesson in which rows stay still. The fund's obligation to the manager does not move. Investor 1's own payment does not move either: it is Rs 25,00,000 lighter in both cases, and investor 1 reading its own statement could not tell the two arrangements apart. The difference sits entirely in the two lower rows. If the reduction comes out of the manager, the fund's obligation is untouched, investor 1 receives the Rs 25,00,000 back from the manager, and no other investor's number moves at all. If the reduction comes out of the fund, the fund still owes the same Rs 9,80,00,000, one investor's share of it is smaller, and the same rupees land on the eleven who are left.

The same thing happens in an ordinary building. Two tenants, same floor, same size flat, and one of them pays less rent. There are two entirely different situations that look identical from inside that flat: the landlord is earning less, or the other tenants are making up the difference. The tenant with the discount cannot tell which. Everybody else can, and it is the only thing about the discount that concerns them.

What does it mean that this fund was raised on a track record with nothing realised in it?

The next part is the one a reader is most likely to misjudge, and it is worth slowing right down for. Nilgiri Growth Partners Fund II, invented, was raised while Nilgiri Growth Partners Fund I, invented, was still running. Raising while the predecessor still runs is normal in the plain sense that it is how the arithmetic of a ten year vehicle works, and it produces a situation that looks alarming until the two clocks are drawn next to each other.

Fund II's final close falls at the start of Fund I's Year 5. Work through Fund I's own numbered capital calls up to that moment and add them: 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 the ten calls Fund I would eventually make. Against Fund I's Rs 2,50,00,00,000 of commitments, that fund was well into its money.

And it had distributed nothing. Not a smaller amount than expected. Nothing at all. Nilgiri Growth Partners Fund I's first distribution came at its own Year 6 Q2, or Fund II's Year 2 Q2, being a year and a half after Fund II had already closed and started drawing capital from its own twelve investors. At the moment Fund II closed, Fund I's total value to paid in stood below 1.00 times, and every rupee of value it was showing was a mark on something it still held rather than cash anybody had received.

Look at where marker 2 sits relative to marker 1. Everything Nilgiri Growth Partners Fund I ever gave back to its own investors happened in the lime stretch, and the lime stretch begins after Fund II had already closed. No manager is timing anything there. The lime stretch is the plain shape of a vehicle that buys unlisted businesses, holds them for years, and sells them towards the end. A fund of this kind spends its first half putting money out and its second half getting money back, so a manager raising a successor at the halfway mark is standing exactly where the money going out has happened and the money coming back has not.

The same point, closer to home. Somebody plants a mango orchard and, four years in, wants to plant a second one on the next plot. Asked how much fruit the first orchard has sold, the honest answer is none. Mango trees do not fruit in four years. The question is not catching her out. The calendar already answered it. The sensible question instead is how the trees are doing, who looked at them, and what that person's assessment is worth.

What does a reader outside a raise actually do with all this?

The practical end of the matter reaches far more people than a fundraise itself ever does. An analyst inside an investor's private markets team reads a placement memorandum and a set of terms and has to write a note on it. A treasury officer at a bank or an endowment administrator is handed a proposal and asked whether the paperwork says what the summary says. A student reads a case and is asked what the numbers mean. In every one of those situations the useful skill is the same: knowing which four questions the material has already answered and which it has quietly left open.

The first move is always to ask which close is being described. A document describing a fund that has held a first close and one describing a fund that has held its final close are describing two very different objects, even where the words and the terms are word for word identical. In the first, the size is still moving, later investors are still to be admitted, and the equalisation machinery is still live. In the second, the size is fixed, no further investor can join, and every period the fund is measured against has begun to run. A note that does not say which of the two it is looking at has left out its most load-bearing fact.

The second move is to name the denominator on every percentage before writing it down. Three places above show the same commitment producing two different true percentages, and the pattern recurs through everything else in this subject. Investor 1 holds 20.0 per cent of the Rs 5,00,00,00,000 of total commitments and 20.4 per cent of the Rs 4,90,00,00,000 committed by the twelve investors. The four largest hold 63.0 per cent on the first denominator and 64.3 per cent on the second. A percentage in this subject is a fraction with two halves, and a sentence that gives only the top half has said almost nothing.

The third move is the side letter question, and it is a habit worth building because it applies far outside private funds. When somebody has been given a better term than everybody else, do not ask how much better. Ask where the cost of it lands. A concession borne by the person granting it and a concession borne by the other people in the room look identical to the person receiving it and are opposite arrangements for everybody else. At Nilgiri Growth Partners Fund II, invented, the answer to that question is written into the documents: side letter 6's exemption is borne by the manager out of its own fee, and that is why the fund's fee base is still the full Rs 4,90,00,00,000 and why the eleven other investors carry none of it.

The fourth move is what to do with a track record, and it is the central discipline of the whole subject. A track record splits into what has actually been received in cash and what is still an estimate of something unsold. Where the estimate is doing most of the work, that is not a verdict in either direction. The questions are what the estimate rests on, who struck it, what independent involvement there was, and how far it has moved since. Each of those questions has a checkable answer. Whether a record is good does not.

And one last thing, a habit rather than a question. A rupee figure in this subject carries the level it belongs to in the same sentence. The fund's unfunded commitment of Rs 20,00,00,000 and investor 1's unfunded commitment of Rs 4,00,00,000 are both correct, both derived by subtraction, and five times apart because one describes a pool and the other describes one party in it. Confusing those two is not a rounding problem. Confusing them is a category error, and it is the single most common one in this subject.