Investment Process and Governance of Funds

1From sourcing to decision

1. Sourcing: finding opportunities through networks, advisers, entrepreneurs and the manager's reputation. Strong "proprietary" deal flow is an advantage.
2. Screening: quick filtering against the fund's strategy (sector, stage, size, geography) and red flags.
3. Due diligence on the company:
   • commercial: market, competition, business model;
   • financial: quality of earnings, cash flow, projections;
   • legal: title, contracts, litigation, compliance;
   • tax, technical and ESG (environmental, social and governance) reviews.
4. Investment committee (IC): reviews the proposal and approves or rejects it.
5. Term sheet and definitive agreements: valuation, instrument and investor rights are negotiated and documented in the share subscription and shareholders' agreements.

Remember

• Sourcing → screening → due diligence → IC approval → term sheet → agreements.

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2Instruments and investor protections

Indian PE and VC investments often use compulsorily convertible preference shares (CCPS) or compulsorily convertible debentures (CCDs). They convert into equity later and carry protective rights:

• Board seat and information rights (regular financial reports).
• Affirmative (veto) rights over key decisions, such as new share issues, big acquisitions, changes to the business plan.
• Anti-dilution protection: adjusts the investor's conversion price if shares are later issued at a lower price.
  • Full ratchet: resets to the new lower price.
  • Weighted average: adjusts partly, depending on how many new shares are issued. It is more founder-friendly.
• Liquidation preference: on a sale or liquidation, the investor gets its money back (or a multiple of it) before ordinary shareholders.
• Tag-along: if promoters sell, the investor can sell on the same terms.
• Drag-along: the investor can require other shareholders to join a sale.
• Right of first refusal (ROFR) / right of first offer (ROFO): priority when others sell shares.
• Exit rights: IPO timelines, a right to sell to the promoters or the company (put option or buyback), or a strategic sale.

Remember

• Anti-dilution: full ratchet (strongest) vs weighted average.
• Tag-along = sell with promoters; drag-along = force others to sell.
• Liquidation preference = investor paid first.

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3Value creation and monitoring

After investing, the manager:

• takes a board seat and tracks performance against the business plan;
• helps with strategy, hiring, governance, systems, fundraising and partnerships;
• monitors risks, covenants and compliance;
• prepares the company for exit.

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4Exits

The timing of exits drives both IRR and the cash returned to investors (DPI).

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5Governance of the fund

• Investment committee: approves investments and exits. Under SEBI's rules, IC members share responsibility for ensuring decisions follow the PPM, the fund's policies and the law.
• Conflict of interest policy: covers deals with associates, allocation of opportunities between funds managed by the same manager, co-investment, and fees from portfolio companies. Conflicts must be disclosed and managed.
• Trustee oversight: in a trust structure, the trustee monitors the manager's compliance with the trust deed, PPM and Regulations.
• Investor advisory committee (LPAC): a group of major investors that reviews conflicts and certain valuation or policy matters.
• Compliance officer and valuation process: independent valuation and a compliance function support good governance.

Remember

• IC members are accountable for decisions matching the PPM and law.
• Conflicts: disclose, manage, and refer to the advisory committee where needed.

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