The document provides an overview of fund economics, including fees and expenses charged by the general partner like management fees, operating expenses, and setup fees. It discusses key fund concepts like the commitment period, drawdowns, distribution waterfall, hurdle rates, catch-up, and profit sharing between limited partners and the general partner. Examples are given to illustrate how profits are distributed after returning capital to investors and paying the hurdle rate.

1. Fund Economics May 2020
Samik Rakshit
Head Fund Operations, pi Ventures @samik_rakshit

2. Fees & Expenses
Distribution Waterfall
Fund Nuances
Agenda

3. Management fee - Amount charged by the General Partner towards managing the fund on
behalf of the Limited Partners. Usually it is 2% p.a. of the Commitment during the
Commitment Period. Post that it will be 2% p.a. of Contribution less any Disposal/ Write-Offs
etc. For more established VCs the management fee can be higher and be in the range of 3%
Operating expense - Amount charged to operate the Fund viz. audit, valuation, fund
administration etc. Usually it ranges between 0.25-0.5% p.a. of commitment.
Set-up fee - Amount charged to Fund as an initial charge to set it up. It is a one time fee and
in the range of 0.5-1% of the Commitment of the Fund.
Investible corpus - The amount of Commitment which is meant for Portfolio Investment i.e.
Commitment - (Management fee + Operating expense + Set-up fee). It usually ranges
between 75-85% of the Total Fund Commitment.
Fee & Expenses

4. Management Fee Curve
Commitment
period
First close
Final close
(INR in crs)
Year
Mngt
fee (%)
Mngt fee
(INR)
Commitment
(INR)
Contribution %
(cumulative)
Disposal %
(cumulative)
Y1 2% 0.8 40 30% 0%
Y2 2% 1.4 70 30% 0%
Y3 2% 3.8 100 50% 0%
Y4 2% 2 100 50% 2%
Y5 2% 1.3 100 70% 5%
Y6 2% 1.2 100 70% 10%
Y7 2% 1.6 100 90% 10%
Y8 2% 1 100 90% 40%
Y9 2% 0.8 100 100% 60%
Y10 2% 0.2 100 100% 90%

5. Fund
1
Fund Structure & Fund Flow
Basic Concept

6. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Fund Structure & Fund Flow
Basic Concept

7. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Manages the fund for LPs by
making Investment decisions
3
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept

8. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Manages the fund for LPs by
making Investment decisions
3
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
4
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept

9. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Manages the fund for LPs by
making Investment decisions
3
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
4
- Pays Management fee.
5
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept

10. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Manages the fund for LPs by
making Investment decisions
3
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
4
- Pays Management fee
5
EXIT 6
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept

11. Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
Commitment
2
Fund
1
Manages the fund for LPs by
making Investment decisions
3
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
4
- Pays Management fee.
- Distribution on exit
5
Distribution on exit
7
EXIT 6
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept

12. Fund
Manages the fund for LPs by
making Investment decisions
- Pays Management fee.
(2% of INR 100cr = INR
2cr)
- Distribution on exit (20%
of INR 300cr = INR60cr)
Distribution on exit
- Return of Commitment (INR
100cr)
- Distribution of profit (80% of
INR300cr = INR240cr)
Commitment INR 100
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
EXIT
Exit @ 4x
Total proceeds received (A) = INR 400cr
(INR 100 cr X 4)
Commitment (B) = INR 100cr
Profit (A - B) = INR 300cr
21
3
4
5 6 7
Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Basic Concept Example

13. Fund Life Cycle
Commitment
Fund Investment
Management fee
Operating expense
Set-up fee
Return of
Capital to all
Investors
Hurdle to
Limited partner
Catch-up
to Investment
Manager
Profit share
Investment Manager(20%)
Limited partner (80%)
Distribution
Drawdown Hurdle Exits
Distribution
Waterfall
Utilisation
Temporary
Investments
Income from
Temporary
Investments

14. Distribution Waterfall
Hurdle
(LP)
Catch-up
(IM)
LP IM
IRR<12%
Return of Capital
In the ratio of their capital
commitments
IRR>12%
LP Share
(80%)
IM
(20%)
Profit Zone
Catch-up Calculation
Hurdle computed @12% for LPs
80% return is 12% of profit
20% return should get 3% (12%*20% / 80%)
Catch-up = 25% (3% / 12%)

15. Fund
Manages the fund for LPs by
making Investment decisions
Commitment
Portfolio 1
Portfolio 2
Portfolio 3
Portfolio 4
Portfolio 5
21
3
4
5 EXIT
7
6
- Pays Management fee.
(1.5-2% of the fund)
- Distribution on exit
- Catchup
- Carry (20%)
- Distribution on exit
- Hurdle (10-12%)
- Profit share (80%)
Investors (LP)
(HNIs, Corporate,
Banks, Others
(Domestic &
Foreign))
General
Partner
Investment
Committee &
Advisory Board
Investment
team
Investment Manager (IM)
Fund Structure & Fund Flow
Hurdle, Catchup and Profit Share (Carry)

16. 0.00x
0.20x
0.40x
0.60x
0.80x
1.00x
1.20x
1.40x
1.60x
1.80x
2.00x
Y1 Y2 Y3 Y4 Y5
Performance measure
DPI RVPI TVPI
Return(x)Return(x)
Performance Measure Curve
Performance ratios
TVPI - Total Value (Distributions + Net Asset Value) divided by Paid-In capital
DPI - Distributions divided by Paid-In capital
RVPI - Residual Value (aka NAV) divided by Paid-In capital
Year DPI RVPI TVPI
Y1 0.00x 1.00x 1.00x
Y2 0.40x 1.20x 1.60x
Y3 0.50x 1.30x 1.80x
Y4 0.60x 1.20x 1.80x
Y5 1.90x 0.00x 1.90x

17. Drawdown - Drawdown from Investors are either made on a deal by deal basis or as per a fixed schedule.
Management fee catch-up - At the Final closing the Management fee is calculated since the inception of
the Fund as if the Commitment at Final closing was in existence since the beginning of the Fund life cycle.
Temporary Investment - When Drawdown is as per fixed schedule there is a lead time between the time
the Commitment is drawn and utilised. During the lead time, the money is parked in Liquid funds. Liquid
funds ensures both returns and liquidity on the parked money. The return earned is distributed to the
LPs. This can be adjusted with the Hurdle calculation.
Commitment period - This is the period during which the fund can make new investments. Post the
commitment period the fund can only make follow-ons. Further the Management fee also is calculated
on commitment during the commitment period. Post the commitment period, the Management fee gets
computed on the contribution less disposals/ write offs.
Fund Nuances

18. Commitment - Amount promised by the Investors
Drawdown/ Contribution - Amount paid by Investor. Drawdown to the fund is usually made either on a deal by
deal basis or on a fixed drawdown schedule.
Utilisation - Part of the Drawdown used for Fund Investment and expenses
Temporary Investment - Part of the drawdown not utilised and parked in Money Market Instruments
Return of Capital - Amount returned towards Drawdown
Hurdle - Minimum Return assured to Investor. The amount the Fund has to pay to the LPs first before they can
take the money. It usually ranges between 8-12%. Hurdle is not accrued in the books.
Catch-up - Part of profit paid to Investment Manager to make good the payment made towards Hurdle to
honour Profit Share
Profit Share - amount of profit distributed to Limited Partner and General Partner. Usually the ratio is 20% IM
(aka Carry) and 80% Limited Partner. Fund starts accruing Carry once the Fund IRR is more than Hurdle rate.
Few Market Standards

19. For more information, write to
samik@piventures.in
*Thanks to Prof Shivaram from IIT Mumbai for the phrase
J AI HIND*

20. Example 1
Proceeds 120
RoC 100
Amount after RoC 20
Profit share 80:20
LP 80% (80% x 20) 16
IM 20% (20% x 20) 4
Example 2
Proceeds 120
RoC 100
Amount after RoC 20
Hurdle @12% after Y1 (LP) 12
Amount after Hurdle 8
Catch-up (25% of Hurdle)
(25% x 12) (IM) 3
Amount after catch-up 5
Profit share 80:20
LP 80% (80% x 5) 4
IM 20% (20% x 5) 1Example 3
Proceeds 115
RoC 100
Amount after RoC 15
Hurdle @12% after Y1 (LP) 12
Amount after Hurdle 3
Catch-up (25% of Hurdle)
(25% x 12) (IM) 3
Amount after catch-up NIL
Example 4
Proceeds 112
RoC 100
Amount after RoC 12
Hurdle @12% after Y1 (LP) 12
Amount after Hurdle NIL
Hurdle, Catchup and Profit Share (Carry)
Basic Example