Fund operations, compliance and risk management for Category I and II AIFs
Operations questions follow a rupee through the fund: commitment, drawdown, fee, valuation, NAV, report. Risk questions test the limits a manager must monitor daily.
Cash and commitments
- Investors commit capital; the manager calls drawdowns by notice per the PPM. Total drawdowns cannot exceed the commitment.
- Distributions follow the waterfall: return of capital, preferred return, catch-up, carried interest; clawback protects investors if later losses reverse earlier carry.
- Fee base, rate and offsets must match the PPM - typically committed capital during the investment period and NAV or invested cost later.
Valuation, NAV, reporting
- Documented valuation policy; unlisted holdings valued consistently, with independent valuation where required. Manager-set or stale marks are a standard trap.
- NAV = fair value of assets less liabilities and accrued fees; per-unit NAV = NAV divided by units.
- Annual audited accounts, periodic investor reporting and SEBI compliance reporting; compliance officer and trustee/board oversight; records produced on inspection.
Risks to monitor
Concentration (25% single investee), sector and currency exposure, exit timing and illiquidity, key-person dependence, related-party and cross-scheme dealings, borrowing limits, and defaulting investors.
Worked example
A Rs 200 crore scheme has called 40% (Rs 80 crore). NAV after accruals is Rs 210 crore and the PPM sets the management fee at 2% of NAV, so the fee is Rs 4.2 crore. It plans a 20-day bridge of Rs 30 crore: the cap is 10% of investable funds, Rs 20 crore, so only Rs 20 crore is permitted although the duration is within 30 days.
Traps
Charging fees on committed capital when the PPM says NAV; ignoring accrued expenses in NAV; assuming Category II can never borrow; satisfying only one of the four borrowing conditions (purpose, amount, duration, frequency); using last round price without testing it for impairment.