Fund Monitoring, Reporting and Exit

1Monitoring a fund

Investors track:

• drawdowns and distributions against expectations and their own cash plans;
• portfolio valuations and how they change between reporting dates;
• fees and expenses charged, against the agreement;
• team changes, key person events and strategy drift;
• compliance: PPM audit results, regulatory actions and conflicts disclosed;
• performance against benchmarks and peers of the same vintage.

Large investors often attend the fund's annual investor meeting and may sit on the advisory committee.

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2Reporting to investors

Typical reports include:

• quarterly reports: portfolio companies, valuations, key developments, fund-level returns (IRR, TVPI, DPI);
• capital account statements: each investor's commitment, contributions, distributions, fees and remaining commitment;
• annual audited financial statements of the fund;
• tax statements for investors' returns (chapter 12);
• notice of material changes, such as changes in key people, fees or strategy.

Standard reporting formats used across the industry make comparison easier. SEBI also requires AIFs to report regularly to it.

Remember

• Capital account statement = your commitment, contributions, distributions and fees.

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3How a fund exits its investments

The fund exits portfolio companies through IPOs, strategic sales, secondary sales to other funds, or buybacks (chapter 7). As exits happen, distributions are paid to investors through the waterfall.

At the end of the tenure, any investments not yet sold must be dealt with:

• sale before the fund ends;
• an extension of tenure, with investors' approval;
• distribution in kind (in specie): giving investors the unsold securities instead of cash, subject to SEBI's rules and investor consent;
• moving remaining assets into a continuation vehicle or a liquidation scheme, as SEBI's rules allow.

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4How an investor exits

• Usually by holding until the fund distributes its proceeds over its life.
• Early exit is possible only by selling the fund interest to another eligible investor (a secondary sale), with the manager's consent. Secondary buyers often pay a discount to NAV, especially in poor markets.
• Units of close-ended AIFs may be listed after final close, with a high minimum trading lot, but trading is rare.

Remember

• Investor exit = wait for distributions, or sell in the secondary market (often at a discount).
• Unsold assets at the end: sell, extend, distribute in kind, or a continuation or liquidation scheme.

Practise this concept (5 questions)