Realised Value, Unrealised Value and Residual Value Compared

Realised value is cash the fund has actually received, with a date on it. Unrealised value is what a holding the fund still holds is carried at, which is an estimate nobody has paid. Residual value is the sum of those estimates. Nilgiri Growth Partners Fund II, invented, had realised Rs 4,38,00,00,000 and carried a residual value of Rs 2,82,00,00,000 at its record date, the end of its Year 9 Q2.

Start with something small enough to hold. Suppose a household has two things of value in it. The first is Rs 4,38,000 sitting in a bank account. The money arrived over the last three years from selling a plot of land a grandmother left, and a bank statement counts it. The second is the flat the household lives in. A similar flat two doors down changed hands last month, so the neighbours reckon this one is worth about Rs 2,82,000 more than was paid for it. Added together, the household is worth Rs 7,20,000 more than it started. The addition is perfectly ordinary and perfectly correct. But the two halves of it are not the same kind of number, and the moment the difference is forgotten, a decision gets made that the first half could pay for and the second half cannot.

A private fund's performance report has exactly that shape, at a scale where the mistake costs more. Each half is a statement about something different, the two add in a way that is perfectly legitimate, and the trouble starts when a reader treats the sum as though it were all of the first kind.

What is realised value, and when does a rupee actually become one?

Realised Value: Cash Received, With a Date On It

Realised valueCash the fund has actually received, with a date, and it cannot be revised. is the total of the cash a fund has actually received from its holdings. Not the cash it expects. Not the cash a buyer has indicated it might pay. Cash that has landed, on a date, in the fund's own account, and which appears on a bank statement somebody could print.

The test is brutally simple, and its simplicity is the whole reason the category exists. One question is asked of any rupee: has somebody outside this fund paid it? If the answer is yes, the day can be named. If the day can be named, the rupee is realised. If it cannot be named, the rupee is not realised, however confident anybody is about it.

Nilgiri Growth Partners Fund II, invented, entered nine holdings across its investment period and had produced Rs 4,38,00,00,000 of proceeds by its record date at the end of its Year 9 Q2. The Rs 4,38,00,00,000 is not one payment. Five separate events make it up, each with a quarter attached, and the five are worth laying out because the dates are the whole point.

Look at the last row before the total. Holding 5 left the portfolio and produced nothing at all. Holding 5 is still a realised position. The question realisation answers is not how much came back but whether the matter is settled. Nil is a realised number. Nil has a date on it, cannot be revised, and is as final as the Rs 2,03,00,00,000 four rows above it. A realisation is the moment a holding stops being an opinion and becomes a fact, whatever size that fact turns out to be.

Two properties follow from having a date, and both matter. The first is that a realised figure cannot be revised. The payment either happened or it did not, and it did, so nobody comes back a year afterwards and restates the Rs 63,00,00,000 that Fund II received in its Year 6 Q3. The second is that a realised figure carries no argument with it. There is nothing to disagree about, no method to prefer, nobody's judgement standing behind it. A realised figure is arithmetic performed by a bank.

The mechanics of turning a holding into cash, and then paying that cash out, are covered separately. One distinction is still worth keeping straight. Money arriving at the fund and money leaving the fund for its investors are two different events on two different dates. In Nilgiri Growth Partners Fund II, invented, every rupee of the Rs 4,38,00,00,000 received by the record date had also been paid out to investors, in four payments falling in that fund's Year 6 Q4, Year 7 Q3, Year 8 Q2 and Year 8 Q4. In this worked case the two figures coincide, and the coincidence keeps the arithmetic clean. Received and paid out do not always match, and where they differ it is the amount received that makes a rupee realised.

What is an unrealised value a statement about?

Unrealised Value: One Holding, One Date, Nobody Has Paid

An unrealised valueWhat a holding still owned is carried at, and nobody has paid it. is what a holding the fund still has is recorded at on a stated date. An unrealised value is a single number attached to a single company, produced by somebody, as at a date somebody chose. The figure it sits beside on a report looks exactly like a realised figure, printed in the same typeface, in the same column, with the same rupee sign in front of it. The two are not the same kind of thing at all.

Go back to the flat. To say the flat is worth Rs 2,82,000 more than was paid for it is to say something quite particular. The claim is that somebody, using some method, looking at some evidence, formed a view on some particular day. Nobody has offered that money. Nobody has said they would. A well informed person, presented with the facts as they stood on a Tuesday, thought that number was the best available answer to a question nobody has been made to answer for real.

An unrealised value on a private fund's report is precisely that. The figure is a carrying valueThe figure a holding is recorded at on a stated date., and the act of setting one is called making a markA single holding's carrying value, and the act of setting it.. Both words keep the reader honest, and both are worth having: a mark is something somebody did, on a date, and it can be done again next quarter and come out differently.

Notice the three things an unrealised value is a statement about, and the one thing it is not. An unrealised value is about one holding, not about a portfolio. The figure is as at one date, not for a period. Somebody produced it, and not everybody observed it. A price is what a buyer paid, and no buyer has paid this, so an unrealised value is not a price.

Nilgiri Growth Partners Fund II, invented, still held five positions at its record date at the end of its Year 9 Q2, and every one of those five carries an unrealised value. Holding 4, Bhavani Speciality Chemicals Private Limited, is carried at Rs 1,08,00,00,000. Holding 6, Vaigai Edutech Private Limited, is carried at Rs 21,00,00,000. Holding 7, Manjira Industrial Services Private Limited, is carried at Rs 39,00,00,000. Holding 8, Kaveri Renewables Private Limited, is carried at Rs 81,00,00,000. The remaining sixty per cent of holding 9, Indravati Packaging Private Limited, is carried at Rs 33,00,00,000. Not one of those five companies has been sold to anybody, so not one of those five figures has ever been tested against a buyer.

Readers new to the subject usually want to know at this point whether the marks are any good. The question is fair and it is a separate one. Who makes a mark, on what timetable, to what standard, with what independent involvement, and why a private mark tends to move on a different rhythm from a quoted price, are all covered separately and carefully. One thing is prior to all of that and survives every possible answer to it: whatever process produced the number, nobody has paid it.

How does residual value differ from an unrealised value?

Residual Value: The Sum of the Marks Still Standing

Residual valueThe sum of the unrealised carrying values across everything still held. is the addition of every unrealised value across everything the fund still has. Scope is the entire difference between the two words, not substance. An unrealised value belongs to one company. A residual value belongs to the fund.

The word residual is doing honest work. Residual means what is left over. At any moment in a closed-end fund's life the portfolio has been divided in two by events: the part that has been settled and turned into cash, and the part that has not. Residual value is the second part, priced at the best figures available for it. A fund is born with everything residual and, if it finishes properly, ends with nothing residual. By then every holding has become a realised number and the residual value is nil.

For Nilgiri Growth Partners Fund II, invented, at its record date at the end of its Year 9 Q2, the addition runs Rs 1,08,00,00,000 plus Rs 21,00,00,000 plus Rs 39,00,00,000 plus Rs 81,00,00,000 plus Rs 33,00,00,000, and it comes to Rs 2,82,00,00,000. The Rs 2,82,00,00,000 is the residual value, and it appears on the fund's report where a listed portfolio would show a market value.

Residual value also appears under a second name. The same figure, being the value of what the fund still has, is what the fund reports as its net asset value. How that figure is struck, audited and presented on a statement is covered separately. For the purposes of the two halves, the residual value and the net asset value of Nilgiri Growth Partners Fund II at its record date are the same Rs 2,82,00,00,000, and residual is the name that sits opposite realised.

What do the two halves add up to?

Total valueRealised plus residual, the numerator of every multiple. is the addition of the two: what has come back plus what is still held. For Nilgiri Growth Partners Fund II, invented, at the record date at the end of its Year 9 Q2, that is Rs 4,38,00,00,000 plus Rs 2,82,00,00,000, being Rs 7,20,00,00,000. Check the addition yourself, in crore if it helps: 438 and 282 make 720.

Against that, the fund had drawn Rs 4,80,00,00,000 of capital from its investors by the same date. The first divided by the second is 1.50 times. The 1.50 times, being the total value of Nilgiri Growth Partners Fund II divided by the capital paid into it at that fund's record date, is the headline number on its performance report.

Two things about that picture are worth sitting with before moving on. The first is that the addition is not a trick and there is no suggestion it should not be done. A fund that reported only its realised value would be understating itself absurdly for the first six or seven years of its life, when almost nothing has been sold and almost everything is still held. The second is that the two segments differ in kind, and no report a reader is ever handed marks the difference. On a performance report both halves are printed as plain figures in the same column, and the reader has to supply the difference from memory.

What was each half produced on, and why are they different multiples?

Here is where most readers stop and where the interesting arithmetic starts. The two halves did not come out of the same pile of money. Each half was produced on its own slice of what the fund spent, and each half divided by its own slice gives two multiples that are nothing like each other, neither of which is the figure the fund quotes.

Nilgiri Growth Partners Fund II, invented, spent Rs 4,00,00,00,000 buying nine holdings across its investment period. The Rs 4,00,00,00,000 splits cleanly in two by what has happened since. Released costThe acquisition cost of the holdings that have been realised. is the acquisition cost of the positions that have been settled and turned into cash. The rest is the cost of what is still held.

Work the released row yourself. Holding 1 cost Rs 70,00,00,000 including its follow-on, holding 2 cost Rs 45,00,00,000, holding 3 cost Rs 60,00,00,000, holding 5 cost Rs 35,00,00,000, and the forty per cent of holding 9 that has been settled released Rs 10,00,00,000 of its Rs 25,00,00,000 cost. Add them: 70 and 45 and 60 and 35 and 10 make 220 crore, being Rs 2,20,00,00,000. The Rs 4,38,00,00,000 of proceeds against that is 1.99 times.

Now the other row. Holding 4 has Rs 60,00,00,000 of cost still out, holding 6 has Rs 30,00,00,000, holding 7 has Rs 30,00,00,000, holding 8 has Rs 45,00,00,000, and the remaining sixty per cent of holding 9 has Rs 15,00,00,000. Add them: 60 and 30 and 30 and 45 and 15 make 180 crore, or Rs 1,80,00,00,000. The Rs 2,82,00,00,000 carried against it is 1.57 times.

Two hundred and twenty plus one hundred and eighty is four hundred, and four hundred and thirty eight plus two hundred and eighty two is seven hundred and twenty. Both additions close, and closing is the check that says the split has been done properly. The two piles of cost are different sizes, so the fund's 1.80 times on cost is not the average of 1.99 and 1.57. A multiple made of two multiples always leans towards the bigger denominator.

One warning, and it is the standing trap of the whole subject. Every figure in the paragraphs above divides by some kind of cost. The fund's own performance report divides by something else entirely, being the money its investors actually paid in. The paid-in figure includes the fee and the expenses on top of the Rs 4,00,00,00,000 that went into companies. Which denominator a multiple uses, and what changes when one is swapped for another, is covered separately. The habit that is needed is asking, every single time: this many times what?

What single addition checks a performance report?

One check is worth carrying away and using on any private fund report. The check takes about ten seconds and it is an addition.

Take the fund's headline multiple, being total value divided by capital paid in. Split it into its two halves by dividing each half separately by the same capital paid in. The first half, realised value divided by paid in, is the part of the multiple that is cash. The second half, residual value to paid inResidual value divided by capital paid in., is the part that is a mark. The two halves split the same numerator and sit over the same denominator, so they must add to the headline exactly.

For Nilgiri Growth Partners Fund II, invented, at its record date at the end of its Year 9 Q2: Rs 4,38,00,00,000 over Rs 4,80,00,00,000 is 0.9125, and Rs 2,82,00,00,000 over Rs 4,80,00,00,000 is 0.5875. Added together they give 1.5000, exactly the 1.50 times the fund reports. The same Rs 4,80,00,00,000 sits underneath both, so nothing is lost and nothing is left over.

Look at where the dashed line sits on that picture. The dashed line marks 1.00 times, the point at which a fund has produced value equal to the money put into it, and it falls inside the second segment rather than the first. The arithmetic reads plainly. The cash half of Nilgiri Growth Partners Fund II's headline multiple at its record date is 0.9125, less than 1.0000, and the fund crosses the line only by counting the estimates.

How far apart are the five marks inside the residual value?

A single figure like Rs 2,82,00,00,000 invites treatment as one estimate. The figure is not one estimate. Five separate estimates about five completely different companies make it up, and they are nothing like each other in strength.

Set each mark against what that holding cost, and five rupee figures become five comparable readings. Holding 4 is carried at Rs 1,08,00,00,000 against Rs 60,00,00,000 of cost, being 1.80 times. Holding 6 is carried at Rs 21,00,00,000 against Rs 30,00,00,000, being 0.70 times. Holding 7 is at Rs 39,00,00,000 against Rs 30,00,00,000, being 1.30 times. Holding 8 is at Rs 81,00,00,000 against Rs 45,00,00,000, being 1.80 times. The remaining sixty per cent of holding 9 is at Rs 33,00,00,000 against Rs 15,00,00,000 of cost still out, being 2.20 times. Every one of those is Nilgiri Growth Partners Fund II, invented, at its record date at the end of its Year 9 Q2.

One of the five is carried below what the fund paid for it, so the marks on this fund's report are not a set of hopeful numbers pointing one way. A carrying value can go down, and on holding 6 it has: Rs 30,00,00,000 went in and Rs 21,00,00,000 is what the fund records against it now. Whether Rs 21,00,00,000 is the right figure, and what holding 6 will eventually produce, are two things nobody knows until a buyer settles them.

The lower strip of that picture carries a small honesty problem, and it appears on real reports constantly. Each holding's carrying value taken as a share of the Rs 2,82,00,00,000 pool, rounded to one decimal place, gives the following. Holding 4 is 38.3 per cent, holding 6 is 7.4, holding 7 is 13.8, holding 8 is 28.7 and holding 9's remainder is 11.7. The printed figures add to 99.9, not 100.0.

Nothing is wrong. The five unrounded shares are five parts of one whole, so they sum to exactly 100.0000 and can do nothing else. The gap shows the rounding. A tenth has come off the printed column and gone nowhere. Nudging one of the five to make the column add up would misstate a real holding to tidy a presentation. The correct response is to say the unrounded shares sum to 100.0 and leave the printed figures alone. A report that shows 99.9 and explains why is more trustworthy than one that shows 100.0 and does not.

How much of this fund's value is cash and how much is an estimate?

Now the central question. Nilgiri Growth Partners Fund II, invented, reports Rs 7,20,00,00,000 of total value at its record date at the end of its Year 9 Q2. How much of that has anybody actually paid?

Divide the residual value by the total value: Rs 2,82,00,00,000 over Rs 7,20,00,00,000. The answer is 0.391666, printing as 39.2 per cent. Readers get it wrong at exactly this point, so name the denominator out loud: 39.2 per cent of the fund's total value, not of its capital paid in, not of its commitments and not of its cost. Divide the other way and Rs 4,38,00,00,000 over Rs 7,20,00,00,000 is 0.608333, printing as 60.8 per cent. The two round to 100.0 between them.

So 60.8 per cent of what this fund reports as value is money somebody has paid, and 39.2 per cent of it is a number five people wrote down about five companies that have not been sold. Nearly two fifths. Not a rounding detail, not a footnote, and not a small residue at the end of a fund's life. Two fifths is the difference between a reader who has understood the report and a reader who has read the total and stopped.

The estimate share is not a constant. The share moves through a fund's life, and the direction of the move is the most informative thing about where a fund has got to. Take two dates on this fund's own clock and no others. At the end of its Year 6, Nilgiri Growth Partners Fund II had realised Rs 63,00,00,000 and carried a residual value of Rs 4,31,00,00,000, so its total value then was Rs 4,94,00,00,000, of which 87.2 per cent was still an estimate. At its record date the same two figures are Rs 4,38,00,00,000 and Rs 2,82,00,00,000, giving Rs 7,20,00,00,000 of which 39.2 per cent is still an estimate. Two points of that fund's own record are drawn above, and the year by year shape of the whole is covered separately.

Read the two bars as a pair. The right hand bar is much taller, so the fund reports far more value at its record date than it did three years earlier on its own clock. But the taller bar is also the one where most of the height is solid: at the earlier date almost nine tenths of a smaller number was an estimate, and at the later date under two fifths of a larger one is. Two things changed at once, and only one of them is visible in a headline multiple.

What does a mark move for, and what does it not move for?

If the estimate half is going to sit next to the cash half in the same column, it helps to know what makes it change. How a mark is produced, who makes one, on what timetable and to what standard, is covered separately and covered properly. A shorter and blunter question comes first, and a reader needs it answered before they can read a report at all: when this number is different next quarter, what will have caused it?

A carrying value responds to two kinds of thing. The first is the business behind it. If the company sells more, or less, or wins something, or loses something, or takes on an obligation it did not have, the thing being valued has changed and the mark can change with it. The second is the evidence available for comparison. Valuing an unlisted company involves looking at what comparable things are worth, and when that evidence moves the mark can move without anything happening inside the company at all.

A carrying value does not respond to a list of things readers often assume it does. A quarter going by does not move it. The fund drawing its management fee does not move it. The fund's term running down, with somebody who would like the position sold, does not move it. Time passing is not an event, and a mark that has not moved for two quarters has not necessarily been neglected: it may simply be that nothing happened worth revaluing for.

Nilgiri Growth Partners Fund II, invented, shows exactly that. Its residual value was Rs 2,82,00,00,000 at the end of its Year 8, and it was still Rs 2,82,00,00,000 at its record date at the end of its Year 9 Q2. Two quarters went by and a further Rs 2,20,00,000 of capital was drawn in that time, and not one of the five carrying values was restated. Nothing had happened at those five companies that anybody chose to record, so nothing moved.

The same fund's record also shows the mark moving, and moving in both directions. The two directions are the part worth carrying away. Holding 3 was carried at Rs 1,20,00,00,000 at Fund II's Year 7 year end, being exactly 2.00 times its Rs 60,00,00,000 of cost. Holding 3 was realised in Fund II's Year 8 Q1 for Rs 1,50,00,00,000, being 2.50 times. Half a turn appeared between the last carrying value and the settled figure, and nothing about that business changed on the day the transaction closed. Holding 6 went the other way, and the timing is the part that teaches. Holding 6 was carried at its Rs 30,00,00,000 of cost right through Fund II's Year 5, and was written down to 0.70 times, being Rs 21,00,00,000, at that fund's Year 6. The deterioration in that business had been visible for three quarters before the mark moved. The carrying value was still Rs 21,00,00,000 at Fund II's Year 7 year end and again at its record date, so once it moved it stayed where it was put.

Both of those are ordinary. Neither of them is evidence about anything wider, and only one conclusion follows from either: a mark is a number that can be restated, and a realised rupee is not. Why a private mark tends to arrive on a different rhythm from a quoted price, and what that difference does and does not mean, belongs to private fund reporting and is worked through there.

How much of the headline is resting on one estimate?

There is a way of feeling the weight of the estimate half rather than just reading its percentage. The fund is taken exactly as it stands, with one of its five marks set aside, as though that holding's carrying value were not being counted at all. Nothing about the fund changes: the cash it has received does not move, the capital it has drawn does not move, and no view is being expressed about the holding. The question is simply how much of the reported 1.50 times is leaning on that one number.

Two things are worth noticing while the control moves. The first is that the multiple never falls below 0.9125 however much is set aside. The floor is the cash, and the cash is not an opinion. The second is that the five holdings are not interchangeable. Setting aside holding 6, the smallest of the five marks, moves the headline from 1.5000 to 1.4563. Setting aside holding 4 moves it from 1.5000 to 1.2750. 0.2250 of this fund's reported 1.5000, being Rs 1,08,00,00,000 of value, rests on one carrying value of one company nobody has bought.

Why can the two halves not be read as one number?

Everything so far has been arithmetic. Getting it wrong has a cost, worked on the same fund at the same date, and the mistake is the ordinary one that the shape of a performance report invites.

How does anybody actually use the split in practice?

What is worth taking away from all of this?

Three sentences carry the whole of it. Realised value is cash with a date, and it cannot be revised. Residual value is the sum of the estimates on what is still held, and it can be. Total value is the two added together, a legitimate addition that quietly stops distinguishing between them.

Then one habit. Whenever a private fund's multiple appears, it is split in two before anything else is done with it. For Nilgiri Growth Partners Fund II, invented, at its record date, that split is 0.9125 of cash and 0.5875 of estimate inside a headline of 1.5000, and the second of those numbers is the one nobody quotes and everybody needs.