How to read a Private Fund Quarterly Report
Read the paid-in figure first, not the multiple. Before even that, ask two questions: as at what date, and how much of this is an estimate. Every other number on the statement is a share of the paid-in figure, a comparison against it, or an estimate that will be divided by it, so a reader who starts at the headline is reading a fraction before seeing its denominator.
A quarterly report is read in an order, and the order is the whole of the skill. The mechanics of a capital call, how a private portfolio gets valued, who does the valuing, and how each measure on the statement is constructed are all covered separately, and the sequence below uses them without re-teaching them. The sequence runs like this: which figure to look at first, which one second, what each answer rules out, and where to stop. Each step closes off a wrong reading of the step after it, so a reading order is not a checklist. A checklist ticked in any order still works. A report read out of order leaves a reader believing things about it that are not so.
Everything below is worked on one investor's statement from Nilgiri Growth Partners Fund II, an invented fund with an invented manager, Nilgiri Alternatives Advisors Private Limited, an invented administrator, Kolar Fund Services Private Limited, and invented portfolio companies throughout. The statement is as at the end of Fund II's Year 9 Q2, called the record date from here on, and nothing after that date appears anywhere on it.
Why is the biggest number on the statement the last one to be read?
A bill from a mobile phone company has the same shape. At the top, in the largest type on the sheet, sits the amount due. Underneath it, in smaller type that most people never reach, sit the call charges, the data charges, the rental, the taxes and last month's credit. The big number is real. The amount due is also entirely made of the small numbers, and if one of the small numbers is wrong then the big number is wrong in exactly the same way, silently, without changing how confident it looks. Nobody would say the amount due is a lie. Anybody would say it is a total, and a total says nothing about what went into it.
A private fund's quarterly statement has the same shape and one extra problem. The headline figure is a multiple, printed as something like 1.50 times. A multiple is a division. A division has a top and a bottom, and the printed number by itself gives neither. Worse, on this kind of statement the top half of that division is made of two utterly different substances mixed together: money that has actually been paid to the investor, and somebody's opinion of the worth of the rest. The headline is not a summary of the statement, it is a fraction assembled from four figures further down, and reading it first means accepting all four without having looked at any of them.
So the order below reads upward. The reading starts with the denominator, then takes the two pieces of the numerator, then the arithmetic that ties them together, and only then the headline that all of it produces. The last step is the one nobody does: look for what is not printed at all. Six steps, and the headline is read fifth.
Once the date is settled, which figure does this reading order look at first?
What are the two questions to ask before reading a single figure?
As at what date, and how much of this is an estimate. Almost nobody asks either one first, and both change what every other number on the statement means.
The date comes first, being the easier of the two questions and genuinely load-bearing. A statement is a photograph, not a film. A photograph says what was true on one day, and that day may be some way in the past by the time the envelope arrives. A figure on this quarter's statement can therefore be the identical figure that was on last quarter's, sitting there looking like news. Nilgiri Growth Partners Fund II, invented, shows this cleanly. At its Year 8 year end the reported value of everything it still held was Rs 2,82,00,00,000. At the record date, two quarters later, the reported value of everything it still held was Rs 2,82,00,00,000. Nothing in the portfolio was bought, sold or re-marked in those two quarters, so not a rupee of that figure is new, and a reader who treats a repeated figure as a fresh one has read the same sentence twice and counted it as two.
One thing did move at this invented fund between those two dates. The movement is small, worth naming precisely, and it shows how the arithmetic can shift on its own. Rs 2,20,00,000 of capital was called in Fund II's Year 9 Q1 to pay the year's fee and expenses. The call is the whole of the change. Nothing was gained, nothing was lost, and no opinion about any company was revised. Everything else on the statement is a figure already seen.
The same Rs 2,82,00,00,000 appears on this invented fund's Year 8 year end statement and again at the record date. What does that mean?
The second question, how much of this is an estimate, is the heart of the whole procedure and it is the reason the order exists at all. The estimate question stays a question rather than an answer for now, to be taken up properly at step 3, by which point the two figures it has to be compared against are both in hand. Asking it early is what stops the first two steps being read as though they were the whole story.
Step 1. How much money has actually gone in?
The first line to find is the one this invented fund's statement calls capital contributed. Other arrangements label the same line contributions to date or paid-in capital, and the wording is theirs to choose. The line is cumulative, meaning everything ever called from this investor since the fund started, not a figure for the quarter. On investor 1's statement, that line reads Rs 96,00,00,000.
Two things make this the right place to start. The first is that it is the denominator of nearly everything else, so every later figure is a share of it. The second is subtler. Capital contributedThe money an investor has actually paid into the fund so far. is one of the very few figures on the statement that nobody has an opinion about. Capital contributed is a sum of bank transfers that either happened or did not. Nothing on this line is a judgement, a mark, a model or a view. A reading of the document anchored to one number should be anchored to the one that cannot be argued with.
The sentence to hold at this point runs as follows. Investor 1 of Nilgiri Growth Partners Fund II, invented, committed Rs 1,00,00,00,000 and has actually parted with Rs 96,00,00,000 of it as at the record date, being 96.0 per cent of what it promised. Everything else on the statement is now measured against that Rs 96,00,00,000, and the figure at the top of the statement is a fraction whose bottom half has just been seen. Step 1 rules out reading any share of a figure before the figure itself has been seen. The rule sounds obvious and is the single most common way this document gets misread.
One caution belongs here. Two different figures answer to almost the same words. The Rs 96,00,00,000 is what one investor has paid. The fund as a whole has drawn Rs 4,80,00,00,000 from all twelve of its investors together, and because investor 1 committed 20.0 per cent of this fund, the fund's figure is exactly five times its own. Both get called paid-in capitalCumulative capital contributed, used as the denominator of most fund measures.. Which of the two is in hand matters at every step after this one, so the level belongs in the same breath as the number: this investor's paid in, or this fund's paid in, never a bare paid in.
Step 2. How much of it has actually come back?
Find the line this invented fund's statement calls distributions received. The distributions line too is cumulative, and other arrangements may label it distributions to date. On this statement it reads Rs 87,60,00,000.
A distributionMoney the fund has paid back out to its investors. is money that left the fund and arrived in the investor's bank account. A distribution is the second of the two figures on the statement that nobody has an opinion about. At Nilgiri Growth Partners Fund II, invented, this figure is made of four payments, made in Fund II's Year 6 Q4, Year 7 Q3, Year 8 Q2 and Year 8 Q4, and every one of them was in cash. There were no distributions at all in this invented fund's first five years and none in Year 9 to the record date.
Now for the part of step 2 that most readers skip: asking what has been netted out of the figure before it was printed. On this invented fund's record, the answer is nothing at all, and that is a more interesting answer than it sounds. Every rupee of the Rs 87,60,00,000 is return of capitalA distribution that repays what was put in rather than a profit., meaning it is repayment of money this investor had already put in, not a share of any profit. Nilgiri Growth Partners Fund II has paid no carried interest to its manager, so nothing has been taken out of the distribution line on the way past, and the Rs 87,60,00,000 is not a smaller version of some larger gross figure.
The running costs clearly exist, so where did they go? The costs were drawn from investors separately, as capital calls, alongside the money used to buy companies. Across this invented fund's life to the record date, Rs 70,20,00,000 of management fee and Rs 9,80,00,000 of fund expenses were called in exactly that way, which is Rs 80,00,00,000 in total. The Rs 80,00,00,000 is already inside the Rs 4,80,00,00,000 the fund has drawn, and therefore already inside this investor's Rs 96,00,00,000 at step 1. No part of it was ever deducted from anything at step 2. How the fee is charged and why its basis changes partway through a fund's life are covered separately; what matters for reading the statement is knowing which line the money is sitting inside.
Step 2 rules out mistaking money repaid for money made. Rs 87,60,00,000 against Rs 96,00,00,000 paid in means this investor has had 0.91 times its money back, and 0.91 is less than 1. A figure that says 1.50 arrives shortly afterwards, so the shortfall is worth stating plainly first: both statements are true at once.
This invented fund has drawn Rs 80,00,00,000 of management fee and expenses from its investors to the record date, and it has paid no carried interest. Where does that Rs 80,00,00,000 sit on investor 1's statement?
Step 3. Which line on this statement is somebody's estimate?
This is the step the whole order was built around. Directly under the distributions line sits another line, printed in the same face, in the same column, aligned to the same right-hand edge. On this statement it says Rs 56,40,00,000 and it is called share of residual value. Nothing about how it is printed distinguishes it from the line above. Everything about what it is does.
The Rs 87,60,00,000 above it is money that arrived. The residual valueThe reported worth of what the fund still holds, which is an estimate. beneath it is this investor's share of a number somebody arrived at for the things the fund still has and has not sold. One of those two figures could be checked against a bank statement this afternoon and the other could not be checked against anything, and the report gives no way to tell them apart. None of that is a criticism of the report. A report of this kind simply is that way, and the reading order exists because of it.
Here is a way to feel the difference. A neighbour sells one of two identical scooters for Rs 60,000 and keeps the other. Ask what the pair was worth and the honest answer is Rs 60,000 plus an opinion. The opinion may be a good one. The opinion may have been formed carefully, by somebody who does this for a living, using every scrap of evidence available. An opinion is still not Rs 60,000 in a bank account, and adding the two together into one figure and calling the total money is the mistake. Add them, by all means. Just never lose which half is which.
Of the two figures Rs 56,40,00,000 and Rs 87,60,00,000 on this invented investor's statement, which one is an estimate?
Now put a size on it, because the question is not whether an estimate is present but how much of the picture it accounts for. At Nilgiri Growth Partners Fund II, invented, as at the record date, the residual value of everything still held is Rs 2,82,00,00,000 and the total value of the fund, being cash already returned plus that residual, is Rs 7,20,00,00,000. Rs 2,82,00,00,000 over Rs 7,20,00,00,000 is 39.2 per cent. The denominator belongs with that figure every single time it is used: 39.2 per cent of this invented fund's total value at its record date has never been sold to anybody, which is a different sentence from 39.2 per cent of anything else. Against this fund's own paid-in capital of Rs 4,80,00,00,000 instead, the same rupees read 58.8 per cent, and both readings are correct about different questions.
At the level of the investor's own statement the proportion is identical, because this fund draws and distributes strictly in proportion to what each investor committed. Rs 56,40,00,000 of estimate against Rs 1,44,00,00,000 of total value is the same 39.2 per cent. The other 60.8 per cent is cash that has already arrived. The two shares round to 100.0 exactly.
Step 3 also has a second half that almost nobody does, and it takes one more question: an estimate of what? A number by itself has no subject. The fund's own record answers that question, even though its investor statement does not, and the answer changes how the figure reads.
Five positions, costing Rs 1,80,00,00,000 between them, carried at Rs 2,82,00,00,000. One of the five, holding 6 in Vaigai Edutech Private Limited, invented, cost Rs 30,00,00,000 and is carried at Rs 21,00,00,000, which is below what was paid for it. Another, holding 9 in Indravati Packaging Private Limited, invented, is the remaining 60 per cent of a position whose other 40 per cent was sold in Fund II's Year 8 Q3 for Rs 22,00,00,000. The Rs 22,00,00,000 is cash and already sits in the distributions line, not in the estimate. Whether any of those marks is right, or good, or worrying is a separate question. How an unlisted position is valued, who does it and on what timetable are covered separately. Step 3 rules out treating an estimate as cash, and that is the whole of its job.
Step 4. Which two figures have to add up, and what if they do not?
Steps 1 to 3 have produced three numbers. Step 4 spends thirty seconds turning them into a check on the entire document, and it is the most useful thirty seconds available to a reader of one of these.
Divide the distributions by the paid-in capital. Rs 87,60,00,000 over Rs 96,00,00,000 is 0.9125. The ratio has a name, distributions to paid inCumulative distributions divided by cumulative capital contributed., and this invented fund's statement prints it rounded to 0.91. Now divide the residual value by the same paid-in capital. Rs 56,40,00,000 over Rs 96,00,00,000 is 0.5875, printed as 0.59. Then add the two.
0.9125 plus 0.5875 is 1.5000, exactly, with nothing left over. And 1.5000 is the headline: this investor's total value to paid inDistributions plus residual value, divided by capital contributed. reads 1.50 times. The two shares must add to the headline because all three are fractions over the same denominator, so the addition is not a coincidence and it is not an approximation: it is an identity, and any statement where it fails has a wrong figure on it.
If it does not add up, one of four numbers is wrong, and which four to ask about is now known: the paid-in figure, the distributions figure, the residual figure, or the headline itself. A named figure is a far more useful question to put to an administrator than a vague sense that something looks odd. The rounding deserves a look, though, before the email goes out. Printed to two places, 0.91 plus 0.59 is 1.50 and looks fine. Printed to two places, a genuine 0.9149 and a genuine 0.5849 also print as 0.91 and 0.59 while adding to 1.4998. Work the check on the rupees rather than on the printed ratios, because the rupees carry no rounding and the ratios do. Rs 87,60,00,000 plus Rs 56,40,00,000 is Rs 1,44,00,00,000, and Rs 1,44,00,00,000 over Rs 96,00,00,000 is 1.50. The rupee version cannot be fooled.
A statement shows distributions to paid in of 0.91, residual to paid in of 0.59, and a headline of 1.50 times. Does it check out?
Step 5. The multiple, and which of three denominators did it use?
Only now, with the denominator seen, the two halves of the numerator separated and the addition checked, does the number at the top get read. On this statement it is 1.50 times, and exactly what it is made of is already known.
The question left is which denominator produced it, and it matters because the same fund on the same day produces different multiples depending on the divisor. At Nilgiri Growth Partners Fund II, invented, as at the record date, total value is Rs 7,20,00,00,000. Divided by the Rs 4,00,00,00,000 the fund paid for its nine holdings it is 1.80 times. Divided by the Rs 4,80,00,00,000 investors actually paid in it is 1.50 times. Divided by the Rs 5,00,00,00,000 they committed it is 1.44 times. Three numbers, one fund, one day, and all three are correct: what changes is the denominator, and a multiple quoted without its denominator has said almost nothing.
An investor's own denominator is what it actually paid in, so an investor's own statement prints the middle one. The gap between 1.80 and 1.50 is the Rs 80,00,00,000 of fee and expenses that was drawn on top of the Rs 4,00,00,00,000 that went into companies, and which bought no company at all. How each of those three measures is built, and why the choice of denominator is not neutral, are covered separately. Step 5 requires something narrower and entirely a reading question: which denominator produced the number at hand. A figure built on one denominator is never comparable with a figure built on another.
Investor 1's statement reads 1.50 times. Which denominator did that division use?
Step 6. What is not printed on this statement at all?
The last step reads the white space, and it is the one step that gets skipped by almost everybody, including people who do this professionally. Three absences are worth hunting for on investor 1's statement.
The first is the one already met at step 3. The statement gives a residual value and does not say what it is an estimate of. There is no line naming the five positions, no line saying that one of them is carried below its cost, and no line saying that none of them has been sold. The fund's own record holds all of that; the investor's statement does not carry it. Other arrangements may report it differently, and what a manager is required to report is set by the Securities and Exchange Board of India and changes, so the current text at sebi.gov.in is the only reliable version of it.
The second absence is the time remaining. The contracted term of this invented fund runs ten years from its final close, so at the record date, 8.50 years in, six quarters remain. The statement does not say so. A reader who does not go and find that out cannot tell whether the five unsold positions have years to run or months.
The third is the one that trips readers hardest, and it is not an absence so much as a word doing two jobs. The statement carries a line called unfunded commitmentThe part of a commitment not yet called., and on this statement it reads Rs 4,00,00,000. Elsewhere, in the fund's own reporting, a figure of Rs 20,00,00,000 is described with exactly the same two words. Both are right. The two figures answer two different questions.
Investor 1 committed Rs 1,00,00,00,000 and has paid in Rs 96,00,00,000, so its own unfunded commitment is Rs 1,00,00,00,000 less Rs 96,00,00,000, being Rs 4,00,00,000. The fund committed nothing to anybody; its investors committed Rs 5,00,00,00,000 to it and it has drawn Rs 4,80,00,00,000, so the fund's unfunded commitment is Rs 5,00,00,00,000 less Rs 4,80,00,00,000, being Rs 20,00,00,000. The two figures are five times apart, both are correct at their own level, and that is exactly why the mistake survives being looked at. The fix is a habit rather than a formula: never write or read either figure without the word investor or the word fund in the same sentence.
Investor 1 of this invented fund committed Rs 1,00,00,00,000 and has paid in Rs 96,00,00,000. What is that investor's own unfunded commitment?
What does the whole pass look like on one statement, start to finish?
Here is the order run once, in full, against investor 1's capital account in Nilgiri Growth Partners Fund II, invented, as at the end of Fund II's Year 9 Q2. The order is the teaching and the numbers are only the instance, so read down the table rather than across it.
| Step | What is read | What it says here | What that answer rules out |
|---|---|---|---|
| Before 1 | The date, and whether anything on the statement is new | End of Fund II's Year 9 Q2. Two of the three rupee figures are unchanged from Year 8 | Reading a repeated figure as fresh news |
| 1 | Cumulative capital contributed | Rs 96,00,00,000 | Reading a share of a figure before seeing the figure |
| 2 | Cumulative distributions received | Rs 87,60,00,000 | Mistaking money repaid for money made |
| 3 | Share of residual value | Rs 56,40,00,000 | Treating an estimate as cash in a bank account |
| 4 | The addition: 0.9125 plus 0.5875 | 1.5000 | A wrong figure sitting on the statement unchallenged |
| 5 | The headline multiple, and its denominator | 1.50 times, on paid in | Quoting a fraction with no denominator attached |
| 6 | What is not printed at all | No line saying what the estimate is of, none saying six quarters of term remain | Reading silence as though nothing were missing |
| Total value | Rs 1,44,00,00,000 | Rs 87,60,00,000 of it received, Rs 56,40,00,000 of it estimated |
Notice what the pass produced that the headline alone never could. Investor 1 has had 0.91 times its money back and holds a claim on an estimate worth another 0.59 times. Another Rs 4,00,00,000 is still callable, being its own unfunded commitment and not the fund's. The estimate is 39.2 per cent of the total value it is being shown, and it stands for five positions none of which has been sold. Every one of those five statements comes off the same sheet of paper as the 1.50 times, and not one of them is visible to a reader who takes the 1.50 times first and stops.
This investor's statement reads 1.50 times. How much of the money it paid in has actually come back to it?
The two lines that sit one under the other
Here is the failure this whole order exists to prevent, and it is not an exotic one. A reader opens the statement, sees 1.50 times at the top, and files it away as: this investment has grown by half. Nothing on the statement contradicted them. The two lines that make up the 1.50 are printed in the same face, in the same column, one under the other, right-aligned to the same edge, with no marker, no shading and no footnote separating them.
The reader now believes that Rs 1,44,00,00,000 is theirs in some usable sense. The truth is that Rs 87,60,00,000 of it arrived in a bank account and Rs 56,40,00,000 of it is a share of five positions that no buyer has ever priced, one of which is carried below what was paid for it. On the money that has actually moved, this investor is at 0.91 times what it put in. The difference between 0.91 and 1.50 is entirely the estimate line.
The cost of the mistake is not that the estimate is wrong. The estimate may be a careful figure produced by people who do this for a living. The cost is that a reader who has merged the two has lost the ability to ask the only question that separates them: how much of this has somebody actually paid for? The question has an exact answer on this statement, and the order above is simply the shortest route to it.
What would somebody who reads forty of these in a quarter do first?
Plenty of people read these documents for a living and never put a rupee of their own into anything. Somebody in the back office of a large investor holds thirty or forty of these statements from thirty or forty different funds, and has to turn them into one line in an internal report by the end of the month. Somebody at a fund of funds reads them because the funds are what their own investors hold. Somebody sitting on an investor advisory committee, like Meera Sathe, invented, who chairs the committee at this invented fund and represents investor 1, reads them because she has to ask the manager sensible questions in a room.
None of the three reads the multiple first. All three open a spreadsheet with four columns in it: paid in, distributed, residual, and the date. The habit that separates somebody who reads forty of these from somebody reading their first is that the experienced reader copies out the rupees and lets the ratios be derived, rather than copying the ratios and trusting them. Rupees do not round. Rupees add. Rupees can be tied back to a bank statement on one side and to a capital call notice on the other. A ratio has already had a decision made inside it, and once it is in a column of a spreadsheet nobody ever asks which decision.
The second thing they do is keep the estimate column separate all the way through, never merged into the total. When somebody upstairs asks how much of the reported value has actually been realised, the answer is then one subtraction away rather than a week of work. For this invented fund at this record date that answer is 60.8 per cent realised and 39.2 per cent still an estimate, on a denominator of Rs 7,20,00,00,000 of total value.
The third thing, and it is the one that takes discipline, is that they write the level next to every figure. Fund or investor. Every time. The Rs 4,00,00,000 and the Rs 20,00,00,000 on this fund's paperwork are both called an unfunded commitment, they are five times apart, and a spreadsheet column headed simply unfunded is how the wrong one ends up in a report that somebody else then relies on. None of this is clever. All of it is the difference between a document that has been read and a document that has merely been looked at.
Step 6 asks what is missing. On this invented investor's statement, which sentence should arguably be there and is not?
Where the vehicle in this worked case sits
Reading a report in the right order is not specific to any country, and nothing in the six steps above changes at a border. The invented fund used throughout is Indian, settled as a trust, and registered with the Securities and Exchange Board of India at sebi.gov.in. The framework for these vehicles, including registration, categories, reporting and conduct, is set there. Reporting requirements, filing frequencies, deadlines, disclosure duties and effective dates are set there, they change, and the current text is the only reliable version of them. The fund's own documents provide its investors with a capital account statement each quarter, an unaudited quarterly report, an audited annual report, a letter from the manager alongside the numbers, a notice for every capital call and every distribution, and an annual valuation report. Other arrangements provide other things. The requirement sits at the source, and the arrangement sits in the fund's own documents.
Sources
| Source | Document | Site |
|---|---|---|
| Securities and Exchange Board of India | The published framework for Alternative Investment Funds, covering registration, categories, reporting and conduct. The invented vehicle in this worked case is registered there | sebi.gov.in |
| Ministry of Corporate Affairs | The source on a company's board, its charges, its filings and its constitutional documents, which is where anything about one of the invented portfolio companies would ultimately sit | mca.gov.in |
| Indian Venture and Alternate Capital Association | The industry body publishing material on private capital in India. Used for orientation only | ivca.in |
| International Organization of Securities Commissions | Named for cross-border conduct principles, which is the level at which the idea of separating realised amounts from estimated amounts is discussed internationally. No principle is quoted or paraphrased as a requirement here | iosco.org |
Nilgiri Growth Partners Fund I and Fund II, Nilgiri Alternatives Advisors Private Limited, Nilgiri Financial Holdings Private Limited, Nilgiri Trusteeship Services Private Limited, Kolar Fund Services Private Limited, Palani Valuation Advisors, a limited liability partnership, Bhavani Speciality Chemicals Private Limited, Vaigai Edutech Private Limited, Manjira Industrial Services Private Limited, Kaveri Renewables Private Limited, Indravati Packaging Private Limited and Meera Sathe are invented.
Educational material. Not advice on any investment, tax, budget or market position.