The Investor Letter: Narrative Alongside the Numbers

An investor letter is the manager's own account of the quarter, written in prose alongside the numbers and bound by no arithmetic. The letter carries what a carrying value cannot: why a holding was written down, what was sold, what the manager did. Only a statement of fact can be checked against the report, so a reader separates the letter's statements of fact from its characterisations.

Picture a small shop with a silent partner in it. At the end of every month the partner receives two things. One is the till roll. The till roll is arithmetic, and anybody who cares to can add it up. The other is a short handwritten note from the shopkeeper saying what happened: the fridge failed in the second week, the school across the road shut for holidays, a new supplier is being tried. The till roll can never say any of that. The note can never be added up. A private fund's reporting arrangement works in exactly that shape, and the manager's letter is the note.

The comparison carries a second thing with it, and the second thing decides how the note has to be read. The till roll is produced by a machine with no opinion about the month. The note is written by the shopkeeper, about the shopkeeper's own month, and nobody checks it. There is nothing inside a sentence that can be reconciled the way a total can be reconciled. Being unreconcilable is not a criticism of the note. The absence of a check decides what kind of reading the note needs, and what a reader can and cannot do with it.

What is an investor letter, and who writes it?

The letter only makes sense against what surrounds it, so the whole delivery comes first. An investor in Nilgiri Growth Partners Fund II, invented, receives six things across a year. One, a capital account statement each quarter. Two, an unaudited quarterly report, delivered within a stated number of days of quarter end that the fund's own documents fix. Three, an audited annual report. Four, a letter from the manager alongside the quarterly numbers. Five, a notice for every capital call and every distribution. Six, an annual valuation report from the independent valuation agent. The six documents together are the reporting packEverything a fund sends an investor for a period, the letter included., and the letter is item four of six.

Now look at who makes each of them. The quarterly numbers are struck by Kolar Fund Services Private Limited, invented, the administrator, whose fund controller Ashwin Baliga puts the net asset value together. The annual valuation report comes from Palani Valuation Advisors LLP, an invented limited liability partnership (LLP), and is signed by its partner Rohit Vaz. The annual financial statements carry an auditor's opinion. Each of those documents has somebody standing between the manager and the investor. Item four has nobody standing there: the letter is written by Nilgiri Alternatives Advisors Private Limited, invented, the manager of the fund the letter is about. The party writing the account is also the subject of the account, and no arithmetic and no auditor reaches a single sentence of it. Being unchecked and being able to say what no other document says are the same fact seen from two sides.

What does the letter look like when it is opened?

A letter is not free-form. Open one and the same four parts appear in the same order. The four parts answer four questions in the order an investor asks them. There is an opening summary putting one figure at the top. There is a passage on what happened across the portfolio as a whole. There is a passage that goes holding by holding, naming companies. And there is a closing passage on the work in hand. Then a signature block, in the name of the manager.

Knowing that shape matters for a practical reason. The third part, the one that goes holding by holding, is where the sentences that no other document could produce actually sit, and it is usually the part a hurried reader skims. The opening summary carries one number that the reader could have found anyway. The portfolio passage tends to blend two kinds of sentence in a single paragraph. The holding-by-holding passage is where a name, a quarter, a rupee figure and a reason appear together, and a reason is the thing a statement has no line for.

What can a letter carry that a carrying value cannot?

Four kinds of thing, and it is worth naming them separately rather than saying vaguely that prose is richer. Take the residual value of Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2. The figure is Rs 2,82,00,00,000 spread across five holdings that have not been sold. As a figure it is complete and correct and it answers exactly one question: how much. Ask it anything else and it has nothing to say.

A report card makes the same point in a form everybody has held. The marks column is struck by the exam office and is arithmetic. The class teacher's remark at the bottom is the only place where the sentence about the term appears. A carrying value is a position and a letter is a reason, and no amount of care in producing the position turns it into the reason.

What is the letter the only place for?

Go one step further than reasons. There is a sharper version of the same point. Four facts about Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2 are on the fund's own record, are not in dispute, and are things a statement reports obliquely or does not report at all.

The first is that the fund is Rs 42,00,00,000 short of returning the capital it has called: it has drawn Rs 4,80,00,00,000 and distributed Rs 4,38,00,00,000, and a reader gets the gap only by doing the subtraction. The second is that it has paid no carried interestA fund manager's share of profit, paid only in the order the fund's contract sets. at all, and a statement shows that as a zero or as a line that is simply absent. The third is that five holdings remain unsold with six quarters of contracted term left. The fourth is that two extensions of one year each exist and neither has been taken. Every one of those four sits in the fund's documents or in a subtraction, and a sentence is the only place any of them can be said outright.

Which sentences in a letter can be checked against a number?

Here is where the reading becomes a method rather than an attitude. Every sentence in a letter belongs to one of two kinds, and the test that separates them takes about two seconds a sentence. A statement of factA sentence that can be checked against a figure somewhere else in the same pack. is a sentence for which some figure, somewhere in the same pack, could show it wrong. The definition stops there, and notice what it does not say. The definition does not say the sentence is true. A statement of fact is the kind of thing that could be shown false, and a reader can go and look.

Take four from one quarter of Nilgiri Growth Partners Fund II, invented. Forty per cent of holding 9 was sold in Year 8 Quarter 3 for Rs 22,00,00,000: the distribution schedule shows Rs 22,00,00,000 paid out in Year 8 Quarter 4, and the holding schedule shows Rs 10,00,00,000 of cost released at 2.20 times. Holding 5 was written off in full at Year 6 Quarter 4: the holding schedule shows a cost of Rs 35,00,00,000 and a value of nil. Holding 6 is carried at 0.70 times its Rs 30,00,00,000 of cost: the carrying value line reads Rs 21,00,00,000. The fund has distributed Rs 4,38,00,00,000 against Rs 4,80,00,00,000 drawn: both totals are printed. Four sentences of prose, four places to look, and in each case a figure elsewhere in the pack would contradict the sentence if the sentence were wrong.

Which sentences cannot be checked against anything?

The other kind. A characterisationA sentence describing how something should be taken, with nothing behind it to check. is a sentence describing how something should be taken, for which no figure anywhere could show it right or wrong. Three sit in the same quarter's letter from Nilgiri Alternatives Advisors Private Limited, invented: that the remaining portfolio is of good quality, that the write-downA reduction in the value a holding is carried at, with no sale involved. of holding 6 reflects a temporary position, and that the manager is pleased with the year.

Turn each of those over and look for the figure that could contradict it. Good quality: there is no quality line in any pack, and no arithmetic produces one. Temporary: the write-down itself is a fact, Rs 30,00,00,000 of cost down to Rs 21,00,00,000 of carrying value at the end of Year 9 Quarter 2 for Nilgiri Growth Partners Fund II, invented, but whether the fall is temporary is a reading of that fact, and no figure in the pack confirms or contradicts a reading. Pleased: nobody can check a state of mind. Whether any of those three sentences is true is not something the pack can settle. Sorting them is not judging them. Sorting only records which ones a reader could take any further.

What happens when two true sentences point in different directions?

The letter stops being a summary here and becomes a choice, and that turn is worth slowing down for. Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2 supports both of the following sentences at the same instant, from the same record, with no dispute about either.

Sentence one: total value is 1.50 times the capital paid in, and the net internal rate of return is 8.3 per cent, above the fund's own 8.0 per cent preferred return. Sentence two: the fund is Rs 42,00,00,000 short of returning the capital it has called and has paid no carried interest at all. Both describe Nilgiri Growth Partners Fund II, invented, at the end of Year 9 Quarter 2. Neither is a spin on the other. The two sentences differ because they use different arithmetic: a multiple counts an estimate of what has not been sold, and the contracted order of payments counts only cash that has actually gone back.

Put a denominator on it. The record demands one every time. Of that 1.50 times capital paid in of Rs 4,80,00,00,000, exactly 0.9125 is cash already received, being Rs 4,38,00,00,000 divided by Rs 4,80,00,00,000 and written 0.91, and exactly 0.5875 is the residual valueThe value put on holdings a fund still has, before any of them is sold. of Rs 2,82,00,00,000 over the same Rs 4,80,00,00,000, written 0.59. The two fractions add to 1.5000 exactly. A letter that opens on the 1.50 and a letter that opens on the Rs 42,00,00,000 are both accurate. The only thing a reader has to notice is which one opened, and then go and find the other. Which of the two openings a letter takes is the manager's choice.

What is to be done with a sentence that has no number behind it?

Suppose a letter says the manager is in advanced discussions on one holding, and attaches no figure. A reader who has just learned the two-column test may reach for the wrong conclusion here, so it is worth being precise. The absence of a figure is not itself anything. The next step turns on a different question: could a figure exist for this sentence yet?

Sometimes the answer is yes, and the figure is simply not in the sentence. A completed sale has proceeds. A realisationThe sale of a holding, in whole or in part, turning a carrying value into cash. has a date and a rupee amount. A carrying value has a number and an as-at date. When a sentence describes one of those and gives no figure, the figure exists on a numbered line somewhere in the same pack, and the reader goes and gets it: forty per cent of holding 9 of Nilgiri Growth Partners Fund II, invented, sold in Year 8 Quarter 3, is Rs 22,00,00,000 on the record. Sometimes the answer is no. Nothing has happened yet, so a price under discussion is not a fact. A letter that invented a figure for a sale that has not occurred would be worse than one that gives no figure, so the missing number is the correct outcome rather than a gap. The reader records the sentence as the manager's reading and looks for it in the next quarter's facts.

What does a reader lose by stopping at the letter?

What is the letter not?

Three things, and each of them is a boundary rather than a criticism. The letter is not audited. The letter is not a valuation. And the letter is not a statement of what comes next.

Of the six things an investor of Nilgiri Growth Partners Fund II, invented, receives, only one carries an auditor's opinion, and that is the audited annual report. The opinion attaches to the annual financial statements. The opinion does not reach a sentence of the manager's letter, and it never claimed to. Everything in the quarterly delivery is unauditedNot covered by an auditor's opinion, which most of a quarterly delivery is not., the letter included. Separately, the annual valuation report from Palani Valuation Advisors LLP, invented, is a valuation opinion and is not an audit opinion, and confusing those two is a distinct error that has its own treatment elsewhere. The letter and the audited annual report differ in what stands behind them, not in how carefully either one is written.

How does somebody who reads these for a living actually use one?

Consider the analyst at investor 5 of Nilgiri Growth Partners Fund II, invented. Investor 5 is a fund of funds holding Rs 50,00,00,000 of the fund's Rs 5,00,00,00,000 of total commitments. The analyst has to write an internal note every quarter and has to sit in front of an investment committee that will ask questions. The letter earns its place in that job in two entirely practical ways.

The two-column test comes first, and it takes about ten minutes on two printed sides. Every sentence goes into one of two lists. The fact list becomes work: each line is taken to the numbers in the same pack and reconciled, and anything that does not reconcile becomes a question with a specific reference attached. The characterisation list becomes the agenda for the next conversation with the manager, recorded as the manager's reading of the quarter with the date it was made. A characterisation is not a fact, so nothing on the second list goes into the note as one. Nothing on the second list is discarded either. Next quarter it may turn into something on the first list.

Then the letter does one thing that nothing else in the delivery does. The letter tells the analyst where to look. A sentence naming holding 6 of Nilgiri Growth Partners Fund II, invented, and its Rs 21,00,00,000 carrying value at the end of Year 9 Quarter 2 sends the analyst to a specific line rather than to a total, and a sentence about six quarters of remaining term sends them to the fund's documents. A statement gives the position, and the letter gives which part of the position somebody thought was worth a paragraph, and knowing where to look is most of an analyst's week. Both of those are jobs the letter can do without anybody having to decide whether they believe a word of it.