Realisation and Distribution: Turning a Holding Into Cash

Realisation is the moment a holding stops being an estimate and becomes cash in the fund's own bank account. Distribution is the separate and later moment that cash leaves the fund for the people who put the money in. Nilgiri Growth Partners Fund II, invented, made four distributions to its record date, each paid in the quarter after the cash arrived, totalling Rs 4,38,00,00,000.

The situation is easiest to picture with no finance in it at all. A household holds a small plot of land on the edge of town, bought years ago by somebody who is no longer alive to explain why. Every relative has a view on what it is worth. A neighbour sold something similar, so one says twelve lakh. A road is coming, so one says eighteen. The papers are a mess, so one says four. All three of them are talking about the same plot on the same afternoon, and not one of those numbers is a price. Those three numbers are opinions with a rupee sign attached.

Then one day the sale deed is signed and the money lands. Now there is exactly one number, and every opinion that disagreed with it is simply wrong in retrospect. Nothing about the plot changed on that day. The change is that an estimate turned into a bank balance. The change from estimate to bank balance, and only that change, is what the word realisation means in a private fund. It is not the moment the holding got better. Realisation is the moment somebody paid.

Now the second half, and it is the half readers skip. The money is in the household's account. The money is not yet in anybody's hands. Somebody has to work out who gets what, whether anything has to be paid off first, and when the transfers actually go out. A week passes, or a month. During that time the money is real, it is counted, and it belongs to nobody in particular. Realisation and the payment that follows it are two different events on two different days, and collapsing them into one is where most misreadings of a private fund begin.

Everything below is worked on one invented fund. Nilgiri Growth Partners Fund II, invented, is a closed-end fund managed by Nilgiri Alternatives Advisors Private Limited, invented, with Nilgiri Trusteeship Services Private Limited, invented, as its trustee and Nilgiri Financial Holdings Private Limited, invented, as its sponsor. Its investors promised Rs 5,00,00,00,000 between them, of which Rs 4,80,00,00,000 has actually been called and paid in to the record date at the end of that fund's Year 9 Q2. The fund bought nine companies and has sent Rs 4,38,00,00,000 back. The gap of Rs 42,00,00,000 between what was called and what has returned carries everything that follows.

What does it mean to say a private fund has realised a holding?

A private fund holds companies whose shares are not traded anywhere. Nobody is buying or selling holding 4 this morning, or this month, or possibly this year, so no screen shows what holding 4 is worth. The fund still has to record it at something, and that something is a carrying valueWhat the fund records a holding at while nobody has bought it.: a number produced by a valuation process, reviewed and signed off, and completely untested by any actual buyer.

A carrying value is an honest attempt at a number. A carrying value is still not a price. The number is what the plot of land is worth according to the relative who has looked hardest at the papers. RealisationThe moment a holding stops being a carrying value and becomes cash the fund actually holds. is what happens when that estimate is replaced by a transaction. Somebody buys the position, or part of it, money moves, and the number stops being a matter of judgement.

The definition is narrow, and it leaves a great deal out. The definition says nothing about whether the fund made money. A holding can be realised at four times what it cost and a holding can be realised at nothing at all, and both of them are realisations. The definition says nothing about who bought the position or how the sale was arranged. Which route a position takes out of a portfolio is covered separately. Realisation is a change of state, from estimate to cash, and it carries no verdict of its own.

Careless writing about counts is exactly what produces a number nobody can check, so here is the fund's own position at its record date, stated three different ways. Nilgiri Growth Partners Fund II, invented, bought nine companies. At the end of that fund's Year 9 Q2, four of the nine are gone entirely: holdings 1, 2 and 3 were sold outright, and holding 5 was written off in full. Five are still held: holdings 4, 6, 7, 8 and 9. Four plus five is nine, the whole portfolio, with nothing missing from the count.

And yet there are five exit events across five holdings, not four. Holding 9 was 40 per cent realised at that fund's Year 8 Q3 and is still held for the other 60 per cent, so it appears on both sides of the line. Holding 9 is the only position in this fund that is simultaneously realised and unrealised, and any sentence about counts here has to say which of the three counts it means. Four holdings gone. Five holdings still held. Five exit events. Say five without saying which, and a reader has no way of knowing whether positions or events were meant, and no way of catching a statement that does not add up.

Is a realisation the same event as a distribution, and if not, what sits between them?

No, and the gap between them is a real place with real work going on inside it. A realisation is something that happens to the fund's portfolio. A distributionA payment out of the fund to the people who put money in. is something that happens to the fund's investors. Cash from a sale lands in the fund's own bank account and sits there, fully real, fully counted, and not yet anybody's, until the manager issues a notice and the transfers go out.

A joint household account after that plot of land is sold works the same way. The money is in. Nobody has been paid. Somebody has to check what is owed, work out each person's share, get the bank details right, and send it. In a private fund that work is not informal. There is an order in which money is applied, fixed years earlier in the fund's own documents and covered separately. There is a notice signed by the chief operating officer of the manager, Farida Contractor, invented, telling every investor what is coming and when. There is an administrator, Kolar Fund Services Private Limited, invented, computing each investor's pro rata share. None of that is instantaneous, and none of it is optional.

On Nilgiri Growth Partners Fund II, invented, the gap between cash arriving and cash leaving was exactly one quarter on every single one of its four distributions, with no exceptions across four separate events. Four pairs of dates make it hard to go on treating the two events as one, and that regularity is this fund's own practice rather than a rule anybody has to follow.

Two things follow from that picture, and both matter more than they look. The first is that a fund can be sitting on cash it has not yet paid out, and on the day it is doing so its bank balance says one thing while its investors have received nothing. Money can be realised and undistributed, and there is nothing irregular about that state at all. The second is that when a fund pays is a matter of its own documents and its own conduct obligations rather than a universal timetable, so the two events can be separated by much more than a quarter, or by a different length each time. Nilgiri Growth Partners Fund II did it in one quarter four times. One fund's practice four times over is not a rule.

The vocabulary has to be exact. A realisation is measured at the portfolio: something the fund held has turned into cash. A distribution is measured at the investor: something the fund held as cash has turned into a credit in somebody's bank account. The two numbers can differ at any date, and a reader who assumes they are always equal will misread every private fund they ever open.

Can a holding leave the portfolio without producing any cash at all?

Yes, and the cleanest way to feel it is to go back to the household. Suppose the plot of land turns out to have a defect in its title that cannot be cured, and after years of trying the household accepts that it is worth nothing to anybody. There is no sale. There is no cheque. Carrying the plot at a number would be a lie, so it leaves the household's list of what it holds. Something ended. No money moved.

A fund calls the same thing a write-offA holding recorded at nothing, which is a realisation event that produces no cash.. Holding 5 of Nilgiri Growth Partners Fund II, invented, is Palar Foods Private Limited, invented. The fund put Rs 35,00,00,000 into it and at that fund's Year 6 Q4 the position left the portfolio producing no cash at all. How a position leaves is covered separately.

Now look at what a write-off does to the arithmetic. The counts above had to be careful for exactly this reason. Holding 5 is one of the four holdings gone entirely and one of the five exit events, and it contributes exactly Rs 0 to everything this fund has ever distributed. Counting exits and assuming each one produced a payment leads to a search for five distributions and a find of four. Counting distributions and assuming each one emptied a holding leads to four holdings gone. Holding 9 only half left, so that answer is right by accident. The record has to be read as it is written rather than inferred from one column.

How much has this fund actually sent back, and how much is still missing?

The arithmetic is simple. The discipline sits in what gets compared rather than in how hard the sum is.

On one side, cumulative capital drawnEvery rupee the fund has ever called, for investments, fee and expenses alike.. Nilgiri Growth Partners Fund II, invented, has called Rs 4,80,00,00,000 from its investors across seventeen separate calls to the record date at the end of its Year 9 Q2. The Rs 4,80,00,00,000 is everything, not just the money that went into companies. An investor's bank account does not care which line an outgoing was booked to, so the figure includes the management fee and the fund's expenses as well. Money that left an investor is money that left an investor.

On the other side, the four distributions. Rs 63,00,00,000 at that fund's Year 6 Q4, Rs 2,03,00,00,000 at its Year 7 Q3, Rs 1,50,00,00,000 at its Year 8 Q2 and Rs 22,00,00,000 at its Year 8 Q4. Add them in order and the running total goes Rs 63,00,00,000, then Rs 2,66,00,00,000, then Rs 4,16,00,00,000, then Rs 4,38,00,00,000. Rs 4,80,00,00,000 went out and Rs 4,38,00,00,000 has come back, so Rs 42,00,00,000 of what this invented fund called from its investors has not yet returned to them at its record date.

One divided by the other gives 0.9125. Nilgiri Growth Partners Fund II has distributed that much for every rupee of the Rs 4,80,00,00,000 paid into it, measured at its record date. The figure is worth stating that way and not otherwise. A bare 0.91 with no denominator attached is a number nobody can check, and how that figure sits alongside the other measures a private fund reports is covered separately.

The picture stops short of one thing. A fifth bar would say that somebody holds the Rs 42,00,00,000, so it is drawn as a hole instead. Nobody holds it. The money is capital that went out and has not come back, and whether it ever does depends on what the five remaining holdings turn into.

Something else follows from the gap, and it is the part that surprises people. Nilgiri Growth Partners Fund II, invented, has an arrangement in which every rupee of investor capital ever drawn must come back before the manager takes any share of profit. Because Rs 42,00,00,000 has not come back, all Rs 4,38,00,00,000 that this invented fund has distributed to its record date is return of capitalA distribution that repays capital already called, before any profit is shared., and the manager has received no preferred return, no catch-up and no carried interest out of any of it. The order in which money gets applied to those things is fixed in the fund's documents and is covered separately. The figures here state where the money has landed, not the sequence that put it there.

What is a distribution yield, and what is it measured against?

Distribution Yield

Sooner or later a private fund's number arrives with the word yield attached, and it looks like the yield on a deposit or a bond. The private fund figure is not that, and the difference is not a technicality. A distribution yieldCash distributed over a period divided by a stated base, named alongside it. is a backward-looking division: cash actually paid out over some period, divided by some base. Two choices sit inside it and both of them can be made differently by two honest people. Which period, and which base.

The period is usually easy to agree on. A private fund has at least three perfectly reasonable candidates for the base, and they are all different sizes, so the base is where it goes wrong. There is the net asset valueThe total of the carrying values of everything the fund still holds. at the start of the period, the figure the fund was carrying its remaining holdings at. There is the capital paid in by the start of the period, the money investors had actually handed over. And there is total commitments, the money they promised, called or not.

Worked on the invented fund, the problem stops being abstract. During its Year 8, Nilgiri Growth Partners Fund II, invented, distributed Rs 1,50,00,00,000 at its Year 8 Q2 and Rs 22,00,00,000 at its Year 8 Q4, being Rs 1,72,00,00,000 in that year. Its net asset value at the start of that year was Rs 3,59,50,00,000. Its capital paid in by the start of that year was Rs 4,71,50,00,000. The same Rs 1,72,00,00,000 divided by each gives 47.8 per cent on the first and 36.5 per cent on the second. Same fund, same year, same rupees out of the same bank account, and the number moves by more than eleven points depending on nothing but which base somebody chose.

The habit worth building is small and it costs nothing. Never write or repeat a yield figure without the base attached in the same breath. Not because a base is wrong, but because there is no default. Somebody choosing the smallest base gets the biggest number, and if nobody names the base, nobody can tell whether that is what happened.

Why did this fund distribute nothing at all for five years?

Because it was buying. Buying is the whole answer, and it is worth saying plainly before anybody reads a failure into it.

Think about somebody who opens a small tailoring unit. In the first two years they are buying machines, taking a deposit on the shop, paying for cloth, hiring one person and then another. Money is going out constantly. There is nothing yet to give back, so nothing comes back to the person who lent them the start-up money. Nobody looking at the tailoring unit would say the business had failed by year two. Anybody looking would say it had not yet reached the part where money comes back.

Nilgiri Growth Partners Fund II, invented, entered all nine of its holdings between its Year 1 Q3 and its Year 5 Q3, and every single one of its exit events fell between its Year 6 Q3 and its Year 8 Q3. The two sets do not overlap by a single quarter on this fund's own record, so the years of buying and the years of selling are cleanly separated, and the absence of any distribution before its Year 6 Q4 is a description of what the fund was doing rather than a verdict on how it was doing.

The full curve of this invented fund's year by year performance record is covered separately, so only two of its points are worth putting beside each other. At the end of its Year 5, Nilgiri Growth Partners Fund II, invented, had distributed nothing at all. At its record date, at the end of its Year 9 Q2, it had distributed Rs 4,38,00,00,000.

Spread across the fund's whole life so far, those four payments make a shape, and the shape is misread more often than any single figure in the record.

A bond pays on dates written into it. A deposit pays on dates written into it. A private fund does neither. A private fund pays when a holding has been realised and the money has been counted, so the payment dates are a consequence of five separate transactions rather than a schedule anybody agreed to in advance. That is why the fund could go from 47.8 per cent of its opening net asset value in one year to nothing at all in the two quarters that followed without a single thing about it changing.

What does a distribution not tell the person receiving it?

A number that arrives with cash attached feels far more solid than it is, so end with the limits.

A distribution states one thing precisely: this much money moved from the fund to the investor on this date. The payment does not state what that money cost to produce. The capital that bought the holdings, the management fee and the fund's expenses all left the investor's account earlier, and none of it is netted off inside the payment. Unsold holdings are carried at a value nobody has tested, so the payment does not state what is left either. Whether anything more is coming depends on five companies and six remaining quarters of contracted term, and a distribution says nothing about that.

Put the invented fund's own position in one line and the limits become obvious. Nilgiri Growth Partners Fund II, invented, has distributed Rs 4,38,00,00,000 against Rs 4,80,00,00,000 called at its record date, and Rs 2,82,00,00,000 of what it is said to be worth on that date has never been sold to anybody. Both halves of that sentence are true at once, and either half quoted on its own gives a picture the other half corrects.

How does somebody actually use any of this?

Three kinds of reader open a private fund's numbers, and each of them turns the same record into a different habit.

An analyst on an investor's private markets team is checking a manager's own reporting against the fund's own record. Their first move is to separate the realisation column from the distribution column and look at whether the dates line up. If a manager reports proceeds in one quarter and the money is still in the fund two quarters later, that is not a scandal, but it is a question worth asking, and it can only be asked by somebody who has not collapsed the two events into one. Their second move is to refuse any yield figure that arrives without a denominator, and to compute it on all three bases themselves so that the manager's choice is visible rather than invisible.

A person on the operations side of the manager, working with Kolar Fund Services Private Limited, invented, as administrator, lives inside the quarter between the two events. The cash has landed. Every investor's pro rata share has to be struck, notices signed by the chief operating officer have to go out, and the fund's own documents fix the order in which the money is applied. None of that is visible from outside, and all of it is why a distribution has a different date from the realisation behind it.

And somebody sitting on an investment committee that has to plan its own cash uses the record in the most practical way of all. The committee looks at the shape rather than the level: four payments in 34 quarters, five clear years with nothing, and two more quarters with nothing at the end. The planning lesson is that a private fund's payments are events rather than income, so a reader who needs money on a date has to get it from somewhere that has contracted to provide it on that date. That is a statement about what this kind of vehicle is, not a suggestion about what anybody should do with their money.