The Private Fund: The Vehicle Behind Almost Every Private Investment

A private fund is a pooled vehicle that takes binding commitments from a small number of investors, calls that money in instalments as it needs it, buys stakes in companies nobody can trade, and returns cash in an order fixed in advance. Nilgiri Growth Partners Fund II, invented, holds Rs 5,00,00,00,000 of commitments and had called Rs 4,80,00,00,000 of it across seventeen notices by its record date.

Almost everything that comes later in this subject is a consequence of two facts. The money arrives when the fund asks for it, not when the investor decides to send it. And nothing the fund buys has a price until two people sit down and agree one. Every idea that comes afterwards, the notices, the carrying values, the multiples, the order in which cash is paid back, is arithmetic built on top of those two facts. The parts are named below, and each is then taken apart separately.

What is a private fund, and how is it different from a fund anyone can buy?

Start somewhere ordinary. Six neighbours on one street decide to put up a small building together. Nobody hands over any cash on the day they shake hands. Each of them promises a maximum, say Rs 20,00,000, and agrees that when the builder sends a bill, they each pay their share of it within a fortnight. One of the six is the person who actually chooses the plot, hires the builder and signs the contracts. Nobody can walk away halfway. Nobody can sell their sixth of a half-built building to a stranger on a Tuesday afternoon. And when the building is finally sold, years later, the money comes back in an order the six of them wrote down before a single brick was laid.

The arrangement on that street is a private fundA pooled vehicle that is not traded, takes commitments and calls them in instalments., at a much larger size, with lawyers and a regulator in the room. Four properties define the structure, and each one is the opposite of something already familiar.

First, it is pooled and closed. One vehicle holds everybody's money, and it stopped accepting new investors when it held its final close. Second, the money is promised rather than paid. An investor signs a commitmentA binding promise to pay a stated maximum into the fund when it asks., a binding maximum, and the cash leaves the investor's account only when the fund asks for a slice of it. Third, nothing it holds can be traded. The companies in it are not listed anywhere, so between one negotiated transaction and the next there is no price at all. Fourth, it has an end date written into it from the beginning. The vehicle is expected to have sold what it holds and paid the cash out by a date fixed years in advance.

Set that against a fund anyone can buy on an exchange, and one sentence carries the whole contrast: a listed vehicle takes an investor's money on the day of purchase, holds things that carry a quoted price, and lets the holding be sold to somebody else whenever the market is open, and a private fund does none of those three things. Listed vehicles are covered separately; the subject here is the private structure itself.

Who are the parties, and which of them holds what the fund buys?

How a Private Fund Is Structured

A private fund is not one organisation. Four parties stand around one pool of money, tied together by a small stack of contracts. The structure looks over-engineered, and the reason is that the party choosing what to buy is deliberately not the party holding what is bought.

Nilgiri Growth Partners Fund II is the vehicle worked through below. The investors are twelve institutions who between them have committed Rs 4,90,00,00,000. The investment manager is Nilgiri Alternatives Advisors Private Limited, and it decides what the fund buys, when, and at what price. The manager has also committed Rs 10,00,00,000 of its own money alongside the twelve. Total commitments therefore come to Rs 5,00,00,00,000, and the manager is exactly 2.0 per cent of the vehicle. The trustee is Nilgiri Trusteeship Services Private Limited, and the assets sit with the trustee rather than with the manager. The sponsor is Nilgiri Financial Holdings Private Limited, and it stands behind the manager and carries the manager's own commitment.

Notice the count. Readers slip here first. Twelve investors committed Rs 4,90,00,00,000. The manager is a thirteenth party putting in Rs 10,00,00,000 on the same terms as the others in most respects, and the two numbers add to Rs 5,00,00,00,000. A share of investor commitments and a share of the total are different numbers. So whenever anybody quotes a share of this fund, the first question is which of the two denominators they divided by. That discipline prevents more errors in this subject than any piece of arithmetic.

The contract holding all of this together is not a single document. There is a trust deedThe Indian instrument that settles the vehicle and binds the parties to it. that settles the vehicle, a contribution agreement that binds each investor to its promise, and a placement memorandum that describes the arrangement to a possible investor before any of it is signed. The memorandum's contents, how it is read, and who inside this structure can actually stop the manager doing something are each covered separately.

What does a commitment actually commit an investor to?

Here is where a reader who has only ever bought a listed holding gets caught. When something is bought on an exchange, the money leaves the buyer's account on the day of purchase, and after that the decision is over. A commitment is the opposite arrangement. On the day an investor signs, it has paid nothing at all. The investor has instead accepted an obligation: to pay a stated maximum, in instalments, on a timetable that somebody else controls, for as long as the vehicle lives.

Think of the electricity connection at a small workshop. The owner signs up for a sanctioned load. No power has been used and no bill has arrived, but the connection is live and the workshop cannot decide, when the first bill comes, that it would rather not. A commitment is a live obligation from the day it is signed, and the only thing missing is the date on which somebody else decides to use it.

Two numbers therefore describe every investor on every day of a private fund's life. The paid inThe total actually contributed so far, always less than or equal to the commitment. figure is what it has actually contributed so far. The unfunded commitmentThe part of a commitment not yet called, which must still be paid on notice. is the rest of the promise, still owed, still payable on notice. The two together add back to the commitment.

Now put the invented fund into that shape, and watch the denominators. Nilgiri Growth Partners Fund II has commitments of Rs 5,00,00,00,000. By its record date at the end of Fund II Year 9 Quarter 2 it had drawn Rs 4,80,00,00,000, or 96.0 per cent of them. Its own unfunded commitment is therefore Rs 20,00,00,000, being 4.0 per cent of the pool. Investor 1, a domestic life insurance company, committed Rs 1,00,00,00,000, or 20.0 per cent of the total. Every investor in this fund is drawn strictly in proportion, so investor 1 has paid in Rs 96,00,00,000 and its own unfunded commitment is Rs 4,00,00,000, being 100 less 96 on its own promise. Rs 20,00,00,000 is the fund's number and Rs 4,00,00,000 is investor 1's number, they are five times apart, and both are correct at their own level.

How does the money get from an investor into a company?

Through a notice. When the manager has agreed to buy something, or has a bill to pay, it issues a capital callThe notice that turns part of a commitment into an actual payment. to every investor at once. The notice names an amount, a deadline for the money to arrive, and what the money is for. Farida Contractor, the chief operating officer of Nilgiri Alternatives Advisors Private Limited, signs them. An investor reading one of these has no discretion about the amount, no discretion about the date and no say in the purpose. The only thing it can do is pay, and the consequences of not paying are set out in the fund's own documents and are covered separately.

The notice is the whole mechanism. Money sits with the investors until the manager needs it, then moves in one step from thirteen bank accounts into the fund and out again to a seller of shares. The arrangement spares the investor from parking money it is not yet using. The cost to the investor is control over its own cash calendar. How one notice is split across investors, what a capital account statement then shows, and how a distribution is traced back the other way are all covered separately.

Now look at nine years of those notices together. The shape is the teaching. Nilgiri Growth Partners Fund II issued seventeen of them to its record date. The first, at Fund II Year 1 Q1, was Rs 13,10,00,000 and bought nothing at all: it covered the cost of setting the vehicle up and running it for a year. The seventeenth, at Fund II Year 9 Q1, was Rs 2,20,00,000 and also bought nothing. Between them the fund put Rs 4,00,00,00,000 into nine companies and drew a further Rs 80,00,00,000 to pay the management fee and the fund's expenses, and those three figures add to the Rs 4,80,00,00,000 it has drawn in total. Thirteen of the seventeen notices fall inside the five-year investment periodThe years in which new positions may be bought. and account for Rs 4,55,50,00,000, being 94.9 per cent of everything ever drawn. The remaining four, spread across three and a half years, add Rs 24,50,00,000 between them and bought nothing whatsoever.

Consider what that thin tail means for an investor. The buying stopped at the end of Year 5, but the vehicle still had to be administered, valued, audited and reported on, and somebody had to be paid for managing what it still held. The last four notices are that, and nothing else. The picture below walks the whole schedule one notice at a time and sets two numbers against each other: how much has been paid in, and how much of the promise is still callable.

What does the fund buy, and what happens to those holdings?

Nine companies, all of them invented, none of them listed anywhere. Nilgiri Growth Partners Fund II put Rs 4,00,00,00,000 of cost into them between Fund II Year 1 Q3 and Year 5 Q3. By the record date four of the nine had left the portfolio and five were still held. What a growth position is, what a buyout is, what a venture round does and what a private loan looks like are each covered separately.

Now the fact that governs everything downstream. Take holding 7, Manjira Industrial Services Private Limited, entered at Fund II Year 4 Q2 for Rs 30,00,00,000. How much is holding 7 worth this morning? There is no answer, and there is no price. A price is a number two parties agreed and acted on. Nobody has agreed anything about holding 7 since the day the fund bought it. Between one transaction and the next, a private holding has a carrying value rather than a price, and a carrying value is somebody's estimate made on a timetable.

An everyday version makes the difference obvious. Two people each hold something worth roughly Rs 40,00,000: one has money in a bank deposit and the other has a half share in the shop next to the bus stand that her household has run for years. The first can state the number to the rupee and turn it into cash by Friday. The second has an opinion, a good one, informed by knowing the business inside out, and will not find out whether the opinion was right until somebody sits across a table and makes an offer. Both people are honest. Only one of them has a price.

The absence of a price is why the rest of this subject has so much machinery in it. Who produces the estimate, how often, on what basis, what an investor's own statement shows, and what happens when the sale price and the last estimate disagree are all covered separately. One point underlies all of that machinery, and it is smaller and harder: the number a private fund reports for something it has not sold is a different kind of number from the one it reports for something it has.

How long does a private fund live, and what happens at the end?

A private fund is the rare financial arrangement that is born with a death date. The termThe contracted life of the fund, after which it is expected to have sold everything. of Nilgiri Growth Partners Fund II is ten years from its final close, and every date in this subject is counted from that close rather than from any calendar. Inside those ten years sits the five-year investment period, the only stretch in which new positions may be bought. After it ends, capital may still be called, but only for a short contracted list, and the four calls set out earlier are exactly that list in action.

Two extensions of one year each are contracted, and the arrangements for taking them differ from one another; neither had been taken at the record date, so this fund's contracted life still ends at the end of its Year 10. Who has to agree to an extension, and what happens to a fund that reaches its end still holding things, are covered separately.

Put the invented fund on that line and the tension is visible. The record date is the end of Fund II Year 9 Quarter 2, or 8.50 years after final close. Six quarters of contracted life remain, and five of the nine holdings have never been sold to anybody. That is not a failure and it is not a warning; it is simply where a ten year vehicle stands in its ninth year, and a reader who cannot sit with it will misread every number that follows.

In India, who exactly is the general partner?

The words limited partner and general partner open almost anything written about this subject, and they appear in the documents of Indian funds too. So it is worth settling now, once, what they refer to here.

Nilgiri Growth Partners Fund II is settled as a trust under an indenture of trust, the form an Indian pooled private vehicle most commonly takes. There is no limited partnership in this structure and there is no general partner as a matter of law. The trustee, Nilgiri Trusteeship Services Private Limited, holds the assets and has duties to the beneficiaries. The manager, Nilgiri Alternatives Advisors Private Limited, makes the investment decisions. The role a general partner performs elsewhere is discharged here by the manager and the trustee between them, and the contract is a trust deed and a contribution agreement rather than a partnership agreement.

And yet the whole imported vocabulary is used anyway, by the investors, by the manager, and inside the documents. The borrowed vocabulary is not sloppiness. The economics of this arrangement, the promise of capital, the drawing of it, the order in which money comes back and the manager's share of profit, were designed in the partnership form somewhere else and brought over as a package. The words came with the economics. So a reader in India has to hold two vocabularies at once, and both appear throughout this subject. The two imported roles, and how they differ from each other, are covered separately.

Where does one invented fund stand today, honestly?

One sentence carries the rest of the subject. Nilgiri Growth Partners Fund II has drawn Rs 4,80,00,00,000 from its investors and the manager, and has paid back Rs 4,38,00,00,000 in four cash distributions across Fund II Years 6 to 8. Every rupee of that Rs 4,38,00,00,000 has gone to giving back capital that was called, and the fund is still Rs 42,00,00,000 short of returning all of it. The manager has therefore been paid no share of profit at all. Not a rupee. In year nine of a ten year fund.

Now the other true sentence. The four positions that have been sold produced that Rs 4,38,00,00,000 in cash, and the five still held are carried at Rs 2,82,00,00,000. Add them and the fund's total value is Rs 7,20,00,00,000 against Rs 4,80,00,00,000 paid in, or 1.50 times over its own 8.50 years to the record date. Both sentences describe the same vehicle on the same morning, and neither is a spin on the other.

The reconciliation is one word: cash. The order in which a private fund pays its investors runs on money actually received, and Rs 2,82,00,00,000 of this fund's value has never been sold to anybody. The Rs 2,82,00,00,000 is an estimate across five companies, one of which has already been written down. A total that mixes cash received with an estimate is doing two different jobs at once, and knowing which part of any headline number is which is the single most useful habit in this subject. How the order of payment works, what the manager's share of profit is called and how it is computed, and how the estimate itself is produced are each covered separately.

Who actually uses this, and what do they do with it?

Three people read the same private fund and take three different things from it, and none of them is deciding whether to invest.

The first is a treasury analyst inside investor 4, the treasury of a domestic bank, with a commitment of Rs 60,00,00,000. The analyst is not thinking about returns at all. The job is a cash calendar: how much of the promise is still unfunded, roughly when notices have arrived in the past, and whether the institution can meet one at short notice without selling something else at a bad moment. The unfunded balance is the only figure in the whole arrangement that can turn into an obligation next week, and for that reader nothing else matters as much. Note the discipline that reader needs most: it must use its own share of the promise and never the fund's, which on this record is the difference between Rs 4,00,00,000 and Rs 20,00,00,000 for investor 1.

The second is an analyst reading the fund's reported numbers, whether for the investor that holds them or for somebody studying the manager. The analyst's first move is to split every headline into the part that is cash already received and the part that is an estimate. On this invented record the split is Rs 4,38,00,00,000 realised against Rs 2,82,00,00,000 not sold, and those are 60.8 per cent and 39.2 per cent of the Rs 7,20,00,00,000 total. A share of investor commitments of Rs 4,90,00,00,000 and a share of the total Rs 5,00,00,00,000 are different numbers on the same fund. The second move is therefore to ask what denominator any quoted share used.

The third is somebody who will never touch a private fund and simply wants to read the newspaper without being fooled. Such a reader needs one habit. Whenever a private vehicle's performance appears anywhere, ask how much of it has actually been sold. The question takes four seconds, and it separates the numbers that have been tested from the numbers that have not. The answer, for this invented fund at its record date, is that Rs 2,82,00,00,000 of its Rs 7,20,00,00,000 has never been sold to anybody.

What is left for later?

Nearly everything, and knowing where the edges are is part of the orientation. The parties named here each have their own treatment: the limited partnership form and the two roles behind it, the placement memorandum a possible investor reads before signing, the mechanics of a capital call across investors, the capital account statement, the order in which cash is paid back, the manager's share of profit and the terms that govern it, the administrator, the sponsor, the key-person arrangements, the side letters and the advisory committee. The clock has its own treatment too: the closes, the periods, the extensions and the multiples a fund reports against them. Each of those is taken in full under its own subject.