How Limited-Partner Advisory Committees Work

An investor advisory committee is a body of investor representatives holding defined consent rights. In Nilgiri Growth Partners Fund II, invented, it consents on four matters: conflicts, valuation policy, the first extension of the term, and any change to the investment policy. The committee cannot approve an investment and cannot reject one. A consent body is not a board, and that distinction decides who actually took every decision.

A building makes the shape easy to picture. Twenty-two flats, one managing agent hired to run the place, and a residents' committee of five. The agent picks the plumber, sets the lift service dates and fixes the watchman's pay. Nobody phones the committee about a leaking tap. But the building's own rules say that if the agent wants to hand the annual painting contract to a firm run by the agent's own brother, the agent may not simply do it. The committee has to agree first, in writing, at a meeting. The committee is not running the building and never was; it holds a small number of defined vetoes over the handful of decisions where the agent's interest and the residents' interest are not the same thing. That is the whole idea, and a private fund's version of it is narrower than most readers expect.

What is this committee, and what job was it created to do?

An investor advisory committeeA body of investor representatives holding defined consent rights. exists because a contract cannot see the future. When the documents of a private fund are drafted, everybody in the room knows that questions will arise over the next decade that nobody can describe in advance, and that some of those questions will be ones the manager cannot answer with a straight face on its own. So the parties do the only honest thing available to them. The drafters agree, in advance, that a defined class of question will be put to somebody who is not the manager, and they write down which class.

The agreement written that way is a consent rightA defined matter the manager may not proceed with unless the body agrees.. A consent right is not a power to instruct and not a power to initiate. A consent right is entirely reactive: it only exists when the manager wants to do a particular kind of thing, and its whole content is that the manager may not do that thing unless the committee agrees. If the manager never proposes a conflicted transaction, the committee never consents to one, and nothing about that is a failure of the committee. A consent right is a gate the manager has to walk through, not a steering wheel somebody else is holding.

Nilgiri Growth Partners Fund II is the fund every rupee below belongs to. The fund is managed by Nilgiri Alternatives Advisors Private Limited, invented, and settled as a trust with Nilgiri Trusteeship Services Private Limited, invented, as trustee and Nilgiri Financial Holdings Private Limited, invented, as sponsor, so what a partnership document would give to a general partner is here discharged by the manager and the trustee between them. Twelve investors committed Rs 4,90,00,00,000 to it and the manager committed a further Rs 10,00,00,000 of its own, making Rs 5,00,00,00,000 of total commitments. Its investor advisory committee has seven members.

Which body actually decides, and why do readers mix the two up?

Because both have the word committee in them, and because a reader meeting private fund documents for the first time reasonably assumes that a committee of investors must be the senior one. It is not. Nilgiri Growth Partners Fund II has two committees, they do different jobs, and the difference between them is the single most common thing readers get wrong in this subject.

The investment committee of Nilgiri Growth Partners Fund II has five members. Four of them, being 80.0 per cent, come from the manager itself. One, being 20.0 per cent, is external to the manager. The investment committee approves every investment the fund makes and every realisation it makes. When the fund bought Palar Foods Private Limited, invented, for Rs 35,00,00,000, the investment committee approved it. When the fund sold Sahyadri Diagnostics Private Limited, invented, for Rs 2,03,00,00,000, the investment committee approved that too. Every buy and every sell in this fund's nine-holding record passed through the investment committee, and not one of them passed through the investor advisory committee.

The investor advisory committee has seven members and every one of them represents an investor rather than the manager. The investor advisory committee does not approve investments and cannot reject one. Put the two bodies side by side and the shape is obvious. The mechanics of how the two bodies interact, and what happens to either when a key person walks out of the door, are covered separately.

How does somebody actually end up with a seat?

Not by election, and not by size. A seatA place on the committee, held by a named individual acting for one investor. on this committee arrives the way almost everything in a private fund arrives. Somebody asked for it during fundraising, and it was written into a document. Nobody voted. There was no nomination process and no ballot. An investor said it would like a seat, the manager agreed, and a clause now exists saying so.

Investor 1 of Nilgiri Growth Partners Fund II is a domestic life insurance company that committed Rs 1,00,00,00,000, being 20.0 per cent of the fund's Rs 5,00,00,00,000 of total commitments. Its seat comes from a side letter. A side letter is a separate agreement between the fund and one investor, sitting alongside the main documents. A seat carries exactly what the paragraph that created it says and not one thing more, so read that paragraph. The way side letters work as a class, and what happens when several investors hold different ones, is covered separately.

Notice the shape of that. The letter grants a seat and it grants a right to match a later term. The letter says nothing about investments, nothing about fees, and nothing about what happens if the named individual moves to another employer. An investor who reads the first clause and stops there has learned that it has a seat. It has learned nothing about the value of that seat, and the value is the part that matters.

What are the four things this committee actually consents to?

Four, and they are worth learning as a list because the list is short and everything outside it is enormous. In Nilgiri Growth Partners Fund II the investor advisory committee consents on conflicts, on valuation policyThe written method by which the fund's unrealised holdings are valued., on the first extensionA contracted right to run the fund past its stated term, on stated conditions. of the term, and on any change to the investment policyThe written statement of what the fund may and may not buy.. Those four are the complete list in this fund's documents. Other funds write other lists, and each such list is a term of its own documents.

Each of the four is narrower than its name suggests, so take them one at a time. A conflict, for this purpose, means a transaction where the manager stands on both sides of the table and sets both prices, and the consent is the moment somebody who is not the manager writes down that the transaction may proceed. The clearest instance available in this fund is a counterfactual it has not done: moving holding 4, Bhavani Speciality Chemicals Private Limited, invented, carried at Rs 1,08,00,00,000, into a new vehicle that buys it from this fund at a price the manager also sets. There the manager is the seller and the buyer at once. Process rather than good intentions answers a conflict of that shape, and the committee's consent is one part of the process. How each of this fund's conflicts arises, and the full answer to each, is covered separately.

Valuation policy is the second, and the word policy is doing all the work. The committee consents to the written method: how an unrealised holding is to be valued, by whom, and on what timetable. The committee does not consent to any individual number produced by that method. Holding 4 is carried at Rs 1,08,00,00,000 and holding 6, Vaigai Edutech Private Limited, invented, is carried at Rs 21,00,00,000 against a cost of Rs 30,00,00,000, being 0.70 times. Neither of those two figures was put to the committee for agreement. Palani Valuation Advisors LLP, an invented limited liability partnership (LLP), values the unrealised holdings annually, the manager marks in between, and Kolar Fund Services Private Limited, invented, strikes the net asset value. The committee agreed the rules of that machine once and does not sign its output.

The third is the first extension of the term, and the word first is the whole of it. The term of Nilgiri Growth Partners Fund II runs ten years from final close and ends at the end of Year 10. Two extensions of one year each are written into the documents. The first is at the manager's election with the prior written consent of the investor advisory committee. The second is not a committee matter at all. Taking it requires the consent of investors holding more than half of commitments by value. A different set of people agrees a different thing. At the record date, being the end of Fund II's Year 9 Quarter 2, neither extension has been taken and six quarters of the original term remain. How a fund's clock runs and what a term means for the holdings still sitting inside it are covered separately.

The fourth is any change to the investment policy, meaning the written statement of what this fund may and may not buy. If the manager wants to buy something the statement does not permit, the honest route is to change the statement, and changing the statement is a consent matter. The investment policy is the one people forget, and it quietly protects an investor who committed money to a growth and buyout fund and would like it to stay one.

What actually happens when a consent is asked for?

The first thing that happens is that most questions never get there. A manager running a fund makes hundreds of decisions a year, and the routing test is not how large the decision is or how much money it involves. The test is only ever whether the decision falls into one of four written categories. Selling Sahyadri Diagnostics Private Limited for Rs 2,03,00,00,000 was the largest single event in this fund's history and it did not reach the committee. Changing the sentence that describes what the fund may buy would reach it immediately, even if no money moved at all. Size is not the test and never was; category is the whole test.

When a question does fall inside one of the four, the process is ordinary and worth knowing because it is unglamorous. The manager circulates a paper setting out the transaction and what it is asking for. The committee meets, in person or otherwise. The fund's own documents fix a quorumThe number of members who must be present for the committee to act., and the quorum is found by reading that document rather than by assuming a number. Members ask what they want to ask. A decision is taken and it is minuted. The consent then exists as a dated written record covering that one matter, and it covers nothing else.

Two things about the members themselves. Each of the seven is an individual acting for one investor, and Meera Sathe, invented, sits for investor 1. Nothing in this fund's record says that a member acts for the five investors who have no seat, and a reader should not quietly assume it does. How a member votes is a matter between the member and the investor it represents.

Does giving consent move the responsibility onto the investors?

No, and this is where the most expensive misunderstanding sits. Consent adds a signature. A signature does not move authorship of the decision, does not move the conflict, and does not move a single rupee of exposure. Go back to the building. If the residents' committee agrees that the managing agent may hire the agent's brother to paint the block, the agent is still the one who chose the painter, still the one supervising the work, and still the one whose brother is being paid. The one change is that five residents wrote down that the arrangement could go ahead. If the paint peels in a year, nobody thinks the residents painted the building.

The distinction matters in a very practical way. A consent does not make a conflicted transaction stop being conflicted, and nobody involved should describe it as having done so. The manager is still on both sides. The consent produces a record that somebody other than the manager looked at the arrangement and agreed it could proceed. The record is a real and useful thing. It is also a much smaller thing than most readers assume on first meeting the word consent.

Seven seats and twelve investors: how much of the money is that?

A quick answer here sounds right and is not, so the arithmetic is worth doing slowly. The seven investors with seats are investors 1, 2, 3, 4, 5 and 6, and then, skipping investor 7, investor 8. Their commitments are Rs 1,00,00,00,000, Rs 75,00,00,000, Rs 80,00,00,000, Rs 60,00,00,000, Rs 50,00,00,000, Rs 40,00,00,000 and Rs 20,00,00,000. Those seven commitments add to Rs 4,25,00,00,000. The five investors with no seat are investors 7, 9, 10, 11 and 12, committing Rs 25,00,00,000, Rs 15,00,00,000, Rs 10,00,00,000, Rs 10,00,00,000 and Rs 5,00,00,000, being Rs 65,00,00,000 between them. Rs 4,25,00,00,000 plus Rs 65,00,00,000 is Rs 4,90,00,00,000. The twelve committed exactly that, so nothing has gone missing.

Now the percentages, and each one needs its denominator said out loud or it means nothing. Against the Rs 4,90,00,00,000 that the twelve investors committed, the seven represented hold 86.7 per cent and the five unrepresented hold 13.3 per cent. Total commitments are Rs 5,00,00,00,000, a figure that includes the Rs 10,00,00,000 the manager committed of its own money. Against that larger figure the same seven hold 85.0 per cent and the same five hold 13.0 per cent. Against nothing but a count of heads, seven of twelve is 58.3 per cent and five of twelve is 41.7 per cent. The same seven people are 58.3 per cent of the investors and 86.7 per cent of the money, and a reader who quotes one of those two numbers without saying which denominator produced it has said almost nothing.

There is a second way of checking that Rs 65,00,00,000, and it is worth doing because it ties to a figure this fund carries elsewhere. Investors 7 to 12, being the six smallest, hold Rs 85,00,00,000 between them. Investor 8 is one of those six and it holds a seat, so take its Rs 20,00,00,000 out: Rs 85,00,00,000 less Rs 20,00,00,000 is Rs 65,00,00,000. The same answer arrives from two directions, and agreement from two directions is the only reason to trust either.

Say plainly what that gap is. The gap describes how one fund's seats were negotiated, and a fund that negotiated differently would show a different gap. The five investors without a seat still hold Rs 65,00,00,000 of commitments, still receive everything the fund's documents say an investor receives, and are still drawn on strictly pro rata alongside everybody else. The one thing they do not hold is a place in the room where a consent is given.

Why did the seats not simply follow the size of the cheque?

Because seats are negotiated, not allocated. If a formula had been used, the list would run straight down the size ranking and stop at seven. It does not. Investor 7 is a corporate treasury that committed Rs 25,00,00,000 and has no seat. Investor 8 is a domestic pension pool that committed Rs 20,00,00,000 and has one. The smallest investor at the table is smaller than the largest investor who is not at it, and that single inversion shows the composition was assembled one conversation at a time rather than computed. Some investors ask for a seat during fundraising and some do not bother; some care about a different term entirely; some are subject to internal rules of their own about sitting on such bodies. None of that shows up in a list sorted by size.

What does chairing this committee involve?

Less than the title suggests, and that is the useful thing to know. Meera Sathe chairs the investor advisory committee of Nilgiri Growth Partners Fund II and represents investor 1, the domestic life insurance company holding the largest commitment in the fund at Rs 1,00,00,00,000. Chairing means running the meeting: agreeing the agenda with the manager, making sure the papers arrive before the meeting rather than during it, giving each of the seven a chance to speak, and seeing that what was decided is written down accurately. The chair convenes and records. The chair does not decide, and the chair's own consent is one of seven rather than a casting vote.

The chair sits for the investor holding 20.0 per cent of the fund. The pairing is a fact about this arrangement, not a rule about any other. This fund's documents happened to produce it.

What happens to an investor that took a seat expecting oversight?

Who pays for the committee, and where does that cost sit?

The fund does. Every rupee the fund pays came from investors. The committee's own costs are fund expensesCosts the fund itself bears, drawn from investors like any other capital., and they sit inside the operating expenses this fund has drawn since formation. The whole expense record of Nilgiri Growth Partners Fund II to the record date appears below. A cost is easier to think about alongside the costs it sits with.

The three operating lines add to Rs 7,30,00,000, and the committee's own costs live inside that figure alongside the administrator, the independent valuation agent, the auditor, legal and custody. The organisational expenses of Rs 2,50,00,000 were drawn at formation. The sum is exactly 0.50 per cent of the Rs 5,00,00,00,000 of total commitments, and 0.50 per cent is the cap this fund's own documents set on that line. This record does not break the Rs 7,30,00,000 down further, so what the committee itself cost cannot be said.

Two consequences follow and both are worth holding. First, the five investors without a seat pay their pro rata share of a committee they do not sit on. Expenses are drawn from every investor in proportion to commitments, and no side letter in this fund changes that. Second, this fund pays investors back before the manager takes any share of profit. Every rupee of expense drawn is a rupee that has to come back to investors first. How that ordering works is covered separately; only the fact of it matters here.

What does an investor without a seat get instead?

Everything except the seat, and that answer is close to literally true. All twelve investors of this fund receive the same six things: a capital account statement each quarter, an unaudited quarterly report, an audited annual report, a letter from the manager alongside the quarterly numbers, a notice for every capital call and every distribution, and an annual valuation report from the independent valuation agent. Investor 12, the smallest at Rs 5,00,00,000, receives the same six as investor 1 at Rs 1,00,00,00,000. The contents of each of those documents are covered separately.

All twelve are also drawn strictly pro rata, so at the record date every one of them has paid in 96.0 per cent of its commitment, whether it has a seat or not. A seat changes the matters an investor may be asked to agree to. A seat changes nothing about the reports an investor receives, the timing of those reports, or the money it pays. The difference is narrower than the word committee suggests.

There is one more route worth naming, and it is not the committee at all. Some matters in this fund go to investors directly rather than to their representatives: the second extension needs investors holding more than half of commitments by value, and replacing a departed key person needs investors holding more than two thirds. Both are votes of the whole investor group, weighted by money, and an investor with no seat carries exactly its own commitment into them. An investor without a seat is not without a voice; it has a differently shaped one. How the key-person clause works is covered separately.

With twenty minutes and a fund's governance section, what is worth reading for?

A governance section answers one question well: who may stop what. Five questions get most of the way to that answer, and all five are answerable from the documents alone.

None of those five questions asks whether the arrangement is good: the documents show how a decision will be taken, and nothing about how it will turn out. A reader who finishes the governance section knowing exactly who may stop what has read it correctly. A reader who finishes it with an opinion about whether the committee is strong enough has read something that was not in the documents.