Placement Memorandum: The Document That Defines the Fund

A placement memorandum is the document that describes a private fund to somebody deciding whether to commit: the vehicle and its parties, the strategy, the economic terms, the governance, the risk factors, the reporting and the subscription mechanics. The memorandum describes. The memorandum does not bind. The indenture of trust and the contribution agreement carry the obligations, and where the two differ the contract governs.

Almost everything a reader will later argue about is decided in this one document before anybody signs anything. The basis the fee is charged on. The order the cash comes back in. Who has to consent before the fund can do a particular thing. Which two people the fund depends on, and what happens the day they stop turning up. All of it is written down, in prose, in one place, and in practice most readers stop somewhere in the strategy section and never reach the rest. The gap between what the document contains and what actually gets read is where most of the trouble starts.

What is a placement memorandum, and who is it written for?

Buying a flat in a building that has not been built yet has the same shape. The developer hands the buyer a thick booklet. The booklet has the site plan, the specification of the fittings, the amenities, the layout of every floor, a section about the builder's earlier projects, a section about what could go wrong, and at the back the mechanics of how payment works and what gets signed. The booklet is not the sale agreement. The sale agreement is a separate, shorter, far less friendly document signed later, and if the booklet says teak and the agreement says engineered wood, the buyer is getting engineered wood.

A placement memorandumThe document describing a private fund to a prospective investor before it commits. sits in exactly that position for a private fund. The memorandum is written by the party raising the money, for a reader who has not yet committed anything, and its job is to describe the vehicle completely enough that the reader can decide whether to go further. The document is long, it is prose rather than tables, and it is the only place where the whole arrangement appears in one binding-free narrative. A placement memorandum is a description of a fund, written before the fund has any investors, by the people who want it to have some.

Authorship by the party raising the money is not a criticism and not a warning. Authorship is a fact, and the fact changes how the document is read. Nobody writes a description of their own arrangement the way an opponent would. So the reader's task is not to look for what the document hides. The task is to know what the document must contain, find each of those things, and then go and read the contract that actually creates them.

Nilgiri Growth Partners Fund II, an invented fund, is the worked case throughout. The fund is settled as a trust under an indenture of trust, registered as a Category II Alternative Investment Fund with the Securities and Exchange Board of India. Nilgiri Trusteeship Services Private Limited, invented, is the trustee. Nilgiri Alternatives Advisors Private Limited, invented, is the investment manager. Nilgiri Financial Holdings Private Limited, invented, is the sponsor. Indian law provides no limited partnership and no general partner, and yet the vocabulary in the documents is the partnership vocabulary throughout. The economics were designed in that form and imported. In this fund the general partner's role is discharged by the manager and the trustee between them, and the contract is a trust deed and a contribution agreement rather than a partnership agreement.

In what order should the eight sections be read?

Here is a reading order that works. The order below suits a reader with little time, and it is not a required structure: no rule anywhere sets the sections of a placement memorandum. The Securities and Exchange Board of India at sebi.gov.in sets what is required of a document like this in India, the requirements change, and a reader who needs the current ones must read the current text there. The eight numbered sections are a way of finding things quickly in a document that is usually organised roughly this way, numbered 1 to 8 so that any later reference can land exactly where it is meant to.

Sections 1 and 2 give the identity of the fund and its stated intentions. Section 3 carries the economics. Section 4 carries the governance. Section 5 lists what could go wrong. Sections 6 and 7 cover reporting and valuation, then the regulatory notes. Section 8 carries the mechanics of committing. The order they are printed in usually runs 1 to 8 in that sequence. The order a reader with five minutes should read them in does not.

Why put section 3 first? Because sections 1 and 2 are the parts a reader will absorb whether they intend to or not. Those two sections are the narrative, they are written to be read, and they will still be there in twenty minutes. Section 3 is a dense block of defined terms that most people skim on the way to somewhere else, and it is the section that decides what the investor eventually receives. Attention is freshest at the start, so the section that decides the money is best read first and the story afterwards.

What do sections 1 and 2 give, and how fast can they be read?

Faster than expected. Both are answering closed questions. Section 1 names the vehicle and the parties. For Nilgiri Growth Partners Fund II that resolves to a short list: a trust under an indenture of trust; Nilgiri Trusteeship Services Private Limited as trustee, holding the assets; Nilgiri Alternatives Advisors Private Limited as investment manager, making the investment decisions; Nilgiri Financial Holdings Private Limited as sponsor, standing behind the manager and putting up the manager's own commitment of Rs 10,00,00,000, being exactly 2.0 per cent of the fund's total commitments of Rs 5,00,00,00,000.

Notice what section 1 does not do. Section 1 names parties and states roles. Section 1 creates no obligation at all. The obligation that the trustee holds the assets, the obligation that the manager acts within a policy, the obligation that the sponsor's money goes in on the same terms as everybody else's: every one of those lives in the trust deed and the contribution agreement, not here.

Section 2 carries the strategy and the investment policyThe written statement of what the fund may and may not buy.. Strategy and policy are two different things wearing one heading, and separating them is most of the value in reading the section at all. The strategy is prose: what kind of businesses, at what stage, in what sort of situation. The investment policy is a boundary: what the fund may buy, what it may not, and what limits it works inside. Nilgiri Growth Partners Fund II describes itself as a closed-end growth and buyout fund, and its policy carries at least one limit a reader can quote back later, namely that follow-on investment after the investment period ends is capped in total at 15.0 per cent of commitments.

The test for section 2 is whether the boundary can be restated in one sentence without using any adjective the document used. A reader who can only reproduce the adjectives has read the strategy and not the policy.

Which three numbers should be found first in section 3?

Section 3 is the economics, and it is where the reading order earns itself. Section 3 carries the term of the fund, the extensions, the investment period, the management fee, the preferred return, the catch-up and the carried interest, usually as a run of defined terms with cross-references. Most of it can wait. Three things cannot, and finding those three is the difference between having read a memorandum and having held one.

The three are the fee basisThe amount the management fee percentage is charged on, which can change during a fund's life., the preferred returnA rate the investor class receives before the manager receives any share of profit., and the type of waterfall. Not the fee rate. The fee basis. Here is what each looks like in Nilgiri Growth Partners Fund II's memorandum, written in that fund's own contracted terms.

Take the third of those slowly. The word carries more than it looks like it does. A whole-of-fundA waterfall in which all capital drawn must come back before any carried interest is paid. waterfall means every rupee of capital the fund ever drew from its investors, for investments and for the fee and for expenses alike, must come back to the investor class before the manager takes any share of profit at all. The other arrangement, where carried interest is taken on each realisation as it happens, is a different animal and sends the reader to a different clause. Which type it is decides what comes next, and the type is therefore one of the three while the rate is not.

Why does the fee basis matter more than the fee rate?

Because the rate is one number and the basis is two different quantities wearing the same percentage. Here is the everyday version. A tailor charges ten per cent. Ten per cent of what? Of the cloth the customer brought, or of the finished garment, or of whatever cloth is left unused at the end of the season? Same rate, three completely different bills, and the only person who is confused is the one who wrote down the words ten per cent and went home.

Section 3 of Nilgiri Growth Partners Fund II's memorandum sets a management fee of 2.00 per cent a year. The memorandum then does what makes the basis worth finding: it says what the 2.00 per cent is charged on, and it says that the base changes. During the five-year investment period the fee is charged on aggregate investor commitments of Rs 4,90,00,00,000. From Year 6 it is charged on the acquisition cost of holdings not yet realised, measured at the start of each year. The manager's own commitment of Rs 10,00,00,000 bears no fee at all, so the base is Rs 4,90,00,00,000 and not Rs 5,00,00,00,000.

Watch what that produces without anybody renegotiating anything. In Year 5 the basis is Rs 4,90,00,00,000 and the charge is Rs 9,80,00,000. At the start of Year 9, holdings 1, 2 and 3 have been sold, holding 5 has been written off and 40 per cent of holding 9's cost has been released, so the acquisition cost of what is still held is Rs 1,80,00,00,000 and the charge for that year is Rs 3,60,00,000. The rate was 2.00 per cent in both years and the annual charge fell by Rs 6,20,00,000, a fall to 36.7 per cent of where it started. The full arithmetic is set out under what a manager is paid for. Where in the document that change was decided is the only concern at this stage.

What is section 4 for, and who does it say can stop something?

Section 4 is the governance, and the honest way to read it is as an answer to one question: when something happens that somebody might object to, who has to be asked? Everything in the section is a variation on that. Committees are standing answers. Key-person provisions are automatic answers. Conflicts clauses are answers to a specific list of situations. Removal and extension are answers that require a vote.

The single most common error a reader makes in this section is treating two committees as one. Nilgiri Growth Partners Fund II has an investment committee of five, four of them from the manager and one external, and it approves every investment and every realisation. The fund also has an investor advisory committee of seven, drawn from seven of the twelve investors and chaired by Meera Sathe for investor 1. The advisory committee consents on conflicts, on valuation policy, on the first extension and on any change to the investment policy. The investor advisory committee does not approve investments and cannot reject one, and a reader who merges it with the investment committee has misread who controls what. How that committee actually works, and how the seats came to be distributed, is covered separately.

The extensionA contracted right to run the fund past its stated term, on stated conditions. terms look like one right and are two, so they are worth reading slowly. The term of Nilgiri Growth Partners Fund II is ten years from final close. There are two extensions of one year each. The first is at the manager's election with the prior written consent of the investor advisory committee. The second requires the consent of investors holding more than half of commitments by value. The two extensions are different decisions with different decision-makers: the first needs seven people in a room to agree, the second needs a vote across the whole investor base. Neither had been taken at the record date, the end of the fund's Year 9 Quarter 2, with six quarters of the term still to run.

Section 4 is also where the key-person provision sits, and where the conflicts the fund has written down are listed with the fund's answer to each. Both of those are covered separately. For reading the document, the useful fact is only that both live in section 4. When section 5 names an exposure, the section to turn back to is already clear.

What does section 5, the risk factors, actually tell a reader?

Less than people expect, and something more useful than what they were hoping for. The risk factorsThe section listing what could go wrong, written by the party raising the money. section is a list of things that could go wrong, written by the party raising the money, usually long, usually unranked, and usually phrased so that each item is undeniably true and impossible to argue with. A reader who tries to grade the fund out of it will find nothing. The section is not written to support a grade.

Here is what it is good for. Treat it as an index. Every substantial risk factor is pointing at a clause somewhere else in the document, and the useful move is to follow the pointer. A risk factor names an exposure; the clause it points at says what, if anything, happens about it, and reading only one of the two establishes almost nothing.

Two more things about section 5. The list is unranked, so the order says nothing about size or likelihood. The section will also contain items that no clause anywhere answers, and that absence is not a defect: some exposures genuinely have no contractual answer, and a document that pretended otherwise would be worse. The section gives a complete-ish list of the things the drafter thought worth naming, and a set of directions back into the rest of the document.

What do sections 6 and 7 carry, and where do they stop?

Section 6 is reporting and valuation, and it answers two questions a prospective investor will otherwise have to ask later and awkwardly. The questions are simple: what will I receive, and who decides what my holding is said to be worth?

For Nilgiri Growth Partners Fund II the first question resolves to a numbered list of six things: 1 a capital account statement each quarter; 2 an unaudited quarterly report within a number of days of quarter end that the fund's own documents fix; 3 an audited annual report; 4 a letter from the manager alongside the quarterly numbers; 5 a notice for every capital call and every distribution; 6 an annual valuation report from the independent valuation agent. The cadence is the fund's own contracted timing and not a rule of any kind.

The second question resolves to three named parties and a division of labour. Kolar Fund Services Private Limited, invented, is the administrator and strikes the net asset value. Palani Valuation Advisors LLP, an invented limited liability partnership (LLP), is the independent valuation agent and values every unrealised holding annually, with Rohit Vaz as its signing partner. The manager marks between those annual valuations, quarterly. Section 6 is where the reader learns that the number on an investor's statement is produced by a chain of three parties rather than by the manager alone, and knowing the chain is what lets a reader ask a sensible question about any figure in it. The work of a fund administrator is covered separately.

Section 7 is the regulatory notes, and the useful thing to know about it is where it stops. Section 7 names which regulator the vehicle is registered with. For this fund that is the Securities and Exchange Board of India, and the vehicle is registered as a Category II Alternative Investment Fund. The conditions attaching to each category are set by the Securities and Exchange Board of India at sebi.gov.in, they change, and a reader who needs to know the current ones must read the current text there. No summary drawn from a memorandum should restate them either: a condition copied out of a document written some time ago and quoted as though it were current is worse than no note at all.

Section 7 also does not say what a great many readers assume it says. Registration with a regulator is a fact about the vehicle, not an opinion about it, and the memorandum's own regulatory notes will usually say so in a line most people skip.

Where does section 8 put a side letter, and what sits above what?

Section 8 is the subscriptionThe act of committing to the fund and signing the documents that bind the commitment. mechanics: how a commitment is made, what an investor signs, the representations it gives, how a transfer works and what happens if a call is not met. Because section 8 describes the paperwork rather than the economics, it is the most procedural part of the document and the part a reader is most likely to meet again.

Section 8 is also where the reader meets, usually in a single sentence, the fact that the manager may enter into separate agreements with individual investors. One sentence is doing a lot of work, and it is the reason the last figure below is a stack rather than a list. Nilgiri Growth Partners Fund II has six side letters. Not one of them changes the management fee the fund charges: side letter 6 gives the staff co-investment vehicle, investor 12, an exemption from the fee and from carried interest, and the manager bears that cost out of its own fee rather than the fund rebating it, so the fund's fee base is still the full Rs 4,90,00,00,000. Side letters are covered separately, and what matters here is only where they sit in the document.

What is the difference between describing something and binding somebody?

One line matters more than any other, and it is worth stating without any hedging. A placement memorandum describes a fund; the indenture of trust and the contribution agreement create the obligations, and where the two differ the contract governs.

The flat that has not been built makes the same point. The brochure is a description written to help a buyer decide. The sale agreement is what a dispute would be settled on. Nobody thinks the brochure is dishonest for being a brochure. But the buyer who reads only the brochure and then signs the agreement without reading it has not read what they agreed to, and the fact that the brochure was accurate makes no difference to that.

Documents of this kind normally say so themselves, somewhere in the front matter or in section 8, in a sentence saying that the memorandum is qualified in its entirety by the fund's constitutional documents. Readers skip it because it reads like boilerplate. The sentence is not boilerplate. The sentence names which of the two texts wins.

Two practical consequences follow. First, any term that matters should be checked against the contract before anybody relies on it, and a memorandum that says one thing while the contribution agreement says another is not an argument won by pointing at the memorandum. Second, and less obviously, a reader who has only read the memorandum has not read the terms and should say so when describing what they know. The distinction is not pedantry. Reading a description of an arrangement is not the same as reading the arrangement.

What does the memorandum not do?

The memorandum carries no forecast and promises no return. The absence is worth saying plainly because a document this thick, written by people who would like a commitment, feels as though it ought to contain a projection somewhere. The memorandum contains no projection, and a reader hunting for one will end up misreading something else as one.

The most common thing to be misread that way is a record of an earlier fund. Nilgiri Alternatives Advisors Private Limited manages six vehicles, and its first, Nilgiri Growth Partners Fund I, also invented, has since wound up: over its own ten years it drew Rs 2,40,00,00,000 and distributed Rs 4,80,00,00,000, being 2.00 times what was paid in on a gross basis and 1.80 times net to its investors after carried interest. The figures belong to that one fund over that one period and to nothing else. A memorandum reproducing a completed record like that is describing a different vehicle over a different stretch of time. A record of the past is not a statement about the fund being offered, and no arithmetic turns one into the other.

There is a detail here that shows how easily a record can be misread in the other direction too, and it is exactly the kind of thing a reader meets in a memorandum. Nilgiri Growth Partners Fund II's final close falls at the start of Fund I's fifth year. At that moment Fund I had made no distribution at all: its first came at its own Year 6 Quarter 2, more than a year after Fund II had closed and begun drawing capital. So Fund II was raised against a record that was entirely unrealised. Raising against an unrealised record is not an irregularity. The timing is the ordinary consequence of the clock: a ten-year fund raising its successor in its fifth year has, by arithmetic, not finished the first one. The record tells a reader which question becomes necessary, not which verdict is supported.

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

Not front to back. Somebody in the operations team of an investor that has committed to a dozen funds, or an analyst at an institution that is being offered one, does not read a memorandum as prose. Such readers arrive with a question and go to the section that answers it. Over time the document stops being a booklet and becomes an index, and the eight-section order set out above is simply that index written down.

Here is the reverse of the reading order: the question a working reader arrives with, the numbered section that holds the answer, and what they do once they have it. In almost every case the memorandum gives the answer and the contract is what makes it true, so every row of the table below ends in a second document.

Notice what is not in that table. There is no row that asks whether the fund is any good, whether a term is favourable, or whether the arrangement is worth entering. A document does not answer questions of that kind. The whole exercise is about locating and understanding information rather than judging a fund. The eight sections establish where things are. Judging the fund is a separate matter.

One last practical note, and it is the one that separates a reader who has done this a few times from one who has not. Write down, for each of the three numbers, not just the number but the sentence it came from and the section it came from. Six months later, when somebody asks why the fee dropped, the useful answer is not Rs 3,60,00,000. The useful answer is that section 3 of Nilgiri Growth Partners Fund II's memorandum said the basis would move from commitments to unrealised acquisition cost from Year 6, and it did.