The Quarterly Report: What a Limited Partner Actually Receives

A limited partner of Nilgiri Growth Partners Fund II, invented, receives six things, and the capital account statement is the spine of them. The statement carries commitment, capital contributed, unfunded commitment, distributions received, share of residual value and total value. Investor 1 at the end of Year 9 Quarter 2 shows Rs 96,00,00,000 contributed against Rs 1,44,00,00,000 of total value, being 1.50 times.

A capital account is one idea wearing institutional clothing, and an ordinary situation carries the whole of it. Twelve neighbours put money into a shared borewell for the street. Somebody keeps the book. The book never records the borewell's worth. The book records what each neighbour promised, what each has actually handed over so far, what has come back, and what each one's slice of the remaining thing is reckoned to be. Every entry in it is that neighbour's own number, worked out from the street's own collections applied at that neighbour's share. A capital account statement from a private fund is exactly that book, at a larger scale, with the arithmetic written down instead of remembered.

A reader arriving here has already met a private fund's net asset value, the idea that a carrying value is an estimate struck on a stated date, and the fact that one fund can honestly quote three different multiples on one day. The capital account statement is where a net asset value, a dated carrying value and three honest multiples all land on one document. A limited partnerThe investor's role in the economics of a fund, whatever legal form the vehicle itself takes. of an Indian private vehicle is not, as a matter of law, a partner at all. Nilgiri Growth Partners Fund II, invented, is settled as a trust, with Nilgiri Trusteeship Services Private Limited, invented, as trustee and Nilgiri Alternatives Advisors Private Limited, invented, as investment manager. The general partner's role is discharged by those two between them, and the contract is a trust deed and a contribution agreement rather than a partnership agreement. The economics were designed in the partnership form and imported whole, so the documents and the investors still say limited partner and capital account over the trust just named.

What does a limited partner actually receive from a private fund?

Six things, and they arrive on three different rhythms rather than one. Each item carries a different kind of information. Numbering them saves hunting for an answer in the wrong document.

Item 1 is a capital account statementOne investor's own account with the fund, built from the fund's drawdowns and distributions at that investor's share. each quarter, and it is the only one of the six that is entirely about the investor rather than about the fund. Item 2 is an unaudited quarterly report, arriving within a stated number of days of quarter end that the fund's own documents fix. Item 3 is an audited annual report, and of the six it is the only one carrying an audit opinion. Item 4 is a letter from the manager alongside the quarterly numbers. Item 5 is a notice for every capital call and every distribution. Notices arrive whenever cash moves, on no calendar at all. Item 6 is an annual valuation report from the independent valuation agent. For this invented fund the agent is Palani Valuation Advisors LLP, an invented limited liability partnership, signing through Rohit Vaz.

One confusion catches careful readers rather than careless ones, and it is worth killing before it starts. The list of six runs in a single direction: the fund reporting to its investors. There is a separate numbered cadence of five items running the other way, from a portfolio company up to the fund, covering a monthly pack, a quarterly board meeting, audited annual accounts, an approved annual budget and immediate notice of certain reserved matters. Different list, different direction, different producer. The five-item arrangement is covered under portfolio company monitoring in private equity, where it is built in full.

What is a capital account statement, and whose arithmetic is it?

A capital account statement is one investor's own account with the fund, and it is not a summary of the fund. The distinction between an account and a summary sounds like pedantry until what follows from it becomes clear. A fund report is about nine holdings and Rs 7,20,00,00,000 of total value. A capital account statement is about one investor: what that investor promised, what has been taken, what has come back, and what that investor's slice of the remainder is reckoned at. Every figure on it is produced by applying the fund's own drawdowns and distributions at one investor's share. The statement holds no judgement of its own and no information the fund's schedules do not already carry.

For Nilgiri Growth Partners Fund II, invented, that share is easy to state and does all the work. Investor 1, a domestic life insurance company, committed Rs 1,00,00,00,000 of the fund's Rs 5,00,00,00,000 of total commitments, or 20.0 per cent. Every call is issued to all investors pro rata and every distribution is paid the same way, so 20.0 per cent is the multiplier standing behind every line. Nothing in the six side letters attaching to this fund moves investor 1's economics: side letter 1 gives it a seat on the investor advisory committee, chaired by Meera Sathe, and a most-favoured-nation right, and neither of those touches a rupee of the arithmetic below.

The administrator prepares the statement. For this invented fund the administrator is Kolar Fund Services Private Limited, invented, where Ashwin Baliga strikes the net asset value the statement then uses.

How is each line on the statement actually produced?

The lines come in order, and each rule is short: none requires anything that cannot be looked up in the fund's own schedules.

The commitmentThe amount an investor has agreed the fund may call, whether or not it has been called yet. comes straight off the contribution agreement and never moves. Investor 1's is Rs 1,00,00,00,000. A commitment is a promise, not a payment, and the whole of the rest of the statement exists because a promise and a payment are different things.

Capital contributedEverything actually called from that investor and paid, for holdings, fee and expenses alike. is the sum of every call notice at the investor's share. Nilgiri Growth Partners Fund II, invented, issued seventeen calls between its Year 1 Quarter 1 and its Year 9 Quarter 1, adding to Rs 4,80,00,00,000. At 20.0 per cent that is Rs 96,00,00,000, and every one of those notices was met in full. The line is worth slowing down over for one reason: what the money was called for. The fund drew Rs 4,00,00,00,000 to buy nine businesses, Rs 70,20,00,000 for the management fee and Rs 9,80,00,000 for fund expenses. Fund expenses cover the administrator, the independent valuation agent, the auditor, legal, custody and the investor advisory committee's own costs. The three draws add to Rs 4,80,00,00,000 exactly. At 20.0 per cent they are Rs 80,00,00,000, Rs 14,04,00,000 and Rs 1,96,00,000, and 80.00 plus 14.04 plus 1.96 crore is Rs 96,00,00,000 exactly. Only Rs 80,00,00,000 of investor 1's Rs 96,00,00,000 ever reached a company at all, and the remaining Rs 16,00,00,000 is the cost of having somebody run the vehicle.

A caution travels with that Rs 14,04,00,000 and it is easy to get wrong. The Rs 14,04,00,000 is investor 1's pro rata share of what the fund drew for the fee, not a per-investor fee allocation, and no per-investor allocation exists for this fund. The fee is charged on aggregate investor commitments of Rs 4,90,00,00,000 while the drawing key is total commitments of Rs 5,00,00,00,000, the manager's own Rs 10,00,00,000 commitment bears no fee, and side letter 6 has the manager rather than the fund bear the staff vehicle's fee. The three facts pull in different directions, so the honest wording is the plain one: a share of a draw, not a bill.

The unfunded commitmentCommitment less capital contributed, being what may still be called. is the line most often mangled, and the mangling is always the same. The unfunded commitment is commitment less capital contributed, and nothing else. For investor 1 of this invented fund at the end of Year 9 Quarter 2, that is Rs 1,00,00,00,000 less Rs 96,00,00,000, being Rs 4,00,00,000. The fund has an unfunded commitment too, at a different level and a different number. Write the subtraction out every time. Nilgiri Growth Partners Fund II, invented, has called Rs 4,80,00,00,000 of its Rs 5,00,00,00,000, so its own unfunded commitment at the same date is Rs 20,00,00,000, or 4.0 per cent of commitments. Investor 1's 20.0 per cent share of that Rs 20,00,00,000 is Rs 4,00,00,000, the same answer arrived at from the other side. The fund's Rs 20,00,00,000 and investor 1's Rs 4,00,00,000 are both correct, they are simply two different levels of the same fact, and putting the fund's figure on an investor's line is the single most common error on this document. The Rs 20,00,00,000 is there for the fee and the expenses of the six quarters remaining in the fund's ten-year term, and nothing else has been earmarked against it.

Distributions received is the sum of every distribution at the investor's share. The fund made four, all in cash: Rs 63,00,00,000 in Year 6 Quarter 4, Rs 2,03,00,00,000 in Year 7 Quarter 3, Rs 1,50,00,00,000 in Year 8 Quarter 2 and Rs 22,00,00,000 in Year 8 Quarter 4, adding to Rs 4,38,00,00,000. At 20.0 per cent investor 1 has received Rs 87,60,00,000. Every rupee of it is return of capitalA distribution applied against capital already drawn rather than against profit.. The fund has distributed Rs 4,38,00,00,000 against Rs 4,80,00,00,000 drawn and is still Rs 42,00,00,000 short of returning what it called. No preferred return has been paid, no catch-up and no carried interest. The contracted order in which those things are paid is covered separately; here the line simply says return of capital and stops.

Share of residual value is 20.0 per cent of what the fund still carries. Nilgiri Growth Partners Fund II, invented, carries Rs 2,82,00,00,000 across five holdings at the end of Year 9 Quarter 2, so investor 1's share is Rs 56,40,00,000. Total value is then the addition of the two lines that represent value in the investor's hands: Rs 87,60,00,000 plus Rs 56,40,00,000 is Rs 1,44,00,00,000. A promise still outstanding is not value received, so the unfunded line is deliberately not part of that sum.

How does the fund's own multiple turn up inside one investor's account?

Whole. The answer is surprising, and it is worth seeing why it has to be so. Because every call and every distribution is issued strictly pro rata, and because no side letter moves investor 1's economics, every figure on investor 1's statement is exactly 20.0 per cent of the corresponding fund figure. Divide any two of them and the 20.0 per cent cancels. A ratio between two lines of a pro rata investor's account is therefore a property of the fund, not of the investor. A Rs 5,00,00,000 investor and a Rs 1,00,00,00,000 investor read the identical multiple off their own statements.

Investor 1's Rs 1,44,00,00,000 of total value at the end of Year 9 Quarter 2 sits over three different denominators, and all three answers are true on the same day. Over the Rs 80,00,00,000 of acquisition cost attributable to it, the answer is 1.80 times. Over the Rs 96,00,00,000 contributed, it is 1.50 times. Over the Rs 1,00,00,00,000 committed, it is 1.44 times. The three answers are the fund's own 1.80, 1.50 and 1.44 reproduced inside a single account. How each of the three is built, and why the third is the one almost nobody quotes, is covered under the private fund lifecycle. A multiple with no denominator has said nothing at all, so each of the three carries its denominator.

Two useful checks fall out of the same arithmetic. Distributions to paid in for investor 1 is Rs 87,60,00,000 over Rs 96,00,00,000, being 0.9125. Residual value to paid in is Rs 56,40,00,000 over Rs 96,00,00,000, being 0.5875. And 0.9125 plus 0.5875 is 1.5000 exactly, the headline multiple. If those two do not add to the headline on a given statement, one of the four figures is wrong, and that check takes ten seconds.

What does the schedule of investments carry?

The capital account statement gives one investor's own totals. The schedule of investmentsThe list of holdings with cost, carrying value and the date the value is as at. is what sits underneath the second of those totals, and it arrives in the quarterly report rather than on the statement itself. The schedule is a plain list: each holding still held, what it cost, what it is carried at, and the date that carrying value is as at.

Nilgiri Growth Partners Fund II, invented, held five of its nine businesses at the end of Year 9 Quarter 2. Four are gone entirely, three sold and one written off in full, and one of the five still held was 40 per cent realised in Year 8 Quarter 3 with the other 60 per cent retained. The partly realised holding sits on both sides, so which count is meant has to be said whenever one is stated: four gone, five held, nine in total, and five separate exit events across five holdings. The five holdings cost Rs 1,80,00,00,000 and are carried at Rs 2,82,00,00,000, and that Rs 1,80,00,00,000 is the same figure the fund's own management fee is charged on in Year 9. The match is a satisfying coincidence rather than a rule.

The column readers skip is the last one. Cost is a fact, the carrying value is an estimate, and the as-at date is what says how old that estimate is. On this invented fund the answer is uncomfortable and completely ordinary. Nothing was revalued in the two quarters since Year 8, so every carrying value in the list is the Year 8 year-end mark carried forward. The independent valuation agent, Palani Valuation Advisors LLP, invented, values the unrealised holdings annually and the manager marks quarterly in between. Why a private mark moves later than a public price, and what that gap does in both directions, is covered separately under valuation lag.

How does a notice turn into a line on the account?

Shorter than might be expected, and following the path once removes most of the mystery from the document. A capital call arrives as a notice signed by Farida Contractor, the chief operating officer of the manager. The notice states the total the fund is calling, the reason, and the investor's share. The investor pays it. The administrator records it. At quarter end it appears inside capital contributed, and it never appears anywhere else. A distribution noticeThe document telling an investor that cash is being paid out, and out of what. runs the same route in the opposite direction and lands inside distributions received.

Across the life of Nilgiri Growth Partners Fund II, invented, to the end of Year 9 Quarter 2, that is seventeen call notices and four distribution notices, twenty one documents in all. Notice the shape of the calls: thirteen of the seventeen fell inside the five-year investment period and account for Rs 4,55,50,00,000, being 94.9 per cent of everything ever drawn. The last four calls, spread across three and a half years, are fee and expenses and nothing else. Every line on the capital account statement is a notice multiplied by a share. An investor can therefore rebuild the entire account from the fund's own schedules, and should do it once.

What arrives outside the quarterly pack, and when?

Two of the six items sit outside the quarterly rhythm. Each answers a question the quarterly pack cannot.

The audited annual report arrives once a year and it is the only one of the six carrying an audit opinion. What an audit signature actually reaches, and the several things it does not reach, is covered separately under fund audit. The annual valuation report from Palani Valuation Advisors LLP, invented, also arrives once a year, and confusing a valuation opinion with an audit opinion is a specific and common mistake, worked through separately under the valuation agent and the audit. One document a year carries an audit opinion, one carries a valuation opinion, and the four quarterly items between them carry neither.

The notices are the third rhythm and the only one with no calendar at all. A call notice arrives when the fund needs cash and a distribution notice arrives when it has cash to send back. Nilgiri Growth Partners Fund II, invented, issued its last call in Year 9 Quarter 1 and made its last distribution in Year 8 Quarter 4, so an investor of this fund has had no notice of either kind for two quarters, and the statement still arrives on time each quarter with the same carrying values on it. The manager's letter is the fourth thing worth naming: it is narrative, it arrives with the quarterly numbers, and what it can and cannot be checked against is covered separately under the investor letter.

On what timetable does any of it actually arrive?

The timetable is fixed by the fund's own documents. Each quarterly pack arrives within a stated number of days of quarter end, set out in the contribution agreement and the trust deed. The conditions attaching to Alternative Investment Fund categories, to registration, to reporting and to conduct are set by the Securities and Exchange Board of India, they change, and the current text is at sebi.gov.in. A filing period quoted from memory rather than read from the current text is the commonest error made about a regulator, and a plausible wrong number is worse than no number at all.

The shape of the year comes from the documents rather than from a rule, and it is certain. Four quarterly packs, and the two annual documents hanging off the fourth of them. Notices whenever cash moves. Side letter 2 gives investor 3, an overseas sovereign-linked investor, additional reporting on a timetable of its own. Not every investor of the same fund receives the same pack.

What is on the statement, and what is not?

Set the two lists side by side and the shape of the document becomes obvious. On one side, six figures and the arithmetic joining them. On the other side, a short list of things a reader arriving at this document for the first time reasonably expects to find and will not.

The statement does not say what the Rs 56,40,00,000 is an estimate of. The statement does not name the five businesses underneath it. Nor does it say that one of them is carried at 0.70 times its cost, or that none of them has been sold to anybody, or that the carrying values are the Year 8 year-end marks carried forward. All of that sits on the schedule of investments in the quarterly report, one document over. The capital account statement is complete and correct and it is not self-explanatory, and the difference between those two things is the practical lesson here.

What goes wrong when total value is read as a valuation?