Let us understand a basics of different Indirect Incomes that can be generated during the life of the fund.
There can be Premium Income generated from LP that has entered in a subsequent closing.
For understanding this, let us understand what is a closing.
Whenever AMC asks for a draw down from all investors, it is referred to as a closing. A fund can have one or more closings. After the final closing is declared, no more money can be drawn down from the investors even if there is still some uncalled amount out of the commitment amount previously decided for the LP's.
Now suppose that a few LP's have invested in the first closing. The first closing happens at the start of the fund for the fund to have some cash for meeting expenses and investment needs. Then as and when the fund finds good investment horizons, it asks for further drawdowns.
Now suppose a new investor decides to enter the fund at the second or some subsequent closing. He will be asked to pay a premium which will be allocated to all the LP's that were present in the previous closings.
This new LP will take a place in all the previous expenses as well as investments. He will be treated as if he was in the fund from the very start. This means that the other LP's investment holdings in the previous investments will reduce as they make place for this LP. Let us understand this with the help of numbers.
An equal percentage of drawdown will be taken from this new LP to get it on par with other LP's. The previous (before entry of new LP) allocation of expenses and investments at LP level are as follows:
After the new LP (LP #6) comes in with a capital commitment of 50 and contributes 20% to be in par with other investors, the re-allocation of numbers based on the new Capital Commitment (CC) ratio will be as follows:
One thing to be noted is that the Management fees total amount was increased because this fees is calculated as a percentage of LP's Capital Commitment. So others previous and new Management Fees was the same, just the new Management Fees of the new LP got added to those.
Now as the new LP gets a part in all the old investments, whose value must have increased over the time. The new LP takes part in them and the holdings of old investors is reduced in it, as we can confirm with the above numbers.
To compensate the old LP's for reduced share in these investments and for the increased value of these investments, the fund charges Premium Amount to that LP which is allocated to other LP's why were present in the previous closing. This amount is generally a percentage of amount contributed by the LP in that closing and is generally mentioned in the Contribution Agreement.
But practically what we have seen is, the AMC waives premium charges to the incoming LP to maintain good relations with the new investor.
Now let us understand Late fees Income for the fund.
Whenever a drawdown call is sent to LP's, it goes with a call date (when the drawdown is generated) and a due date (deadline for the amount to be paid). If an LP pays after the due date, he is subjected to pay a Late Fees which is allocated to other LP's. In some rare cases, we have seen that this income is allocated to all the LP's including the one who pays it. And in practical scenario, this fee is generally waived by the fund to maintain good investor relations.
General Indirect Income
Other Indirect Incomes can be generated through some short term investments that the fund must have made with the extra cash lying with it, before that was invested in the portfolio companies.
There can be Premium Income generated from LP that has entered in a subsequent closing.
For understanding this, let us understand what is a closing.
Whenever AMC asks for a draw down from all investors, it is referred to as a closing. A fund can have one or more closings. After the final closing is declared, no more money can be drawn down from the investors even if there is still some uncalled amount out of the commitment amount previously decided for the LP's.
Now suppose that a few LP's have invested in the first closing. The first closing happens at the start of the fund for the fund to have some cash for meeting expenses and investment needs. Then as and when the fund finds good investment horizons, it asks for further drawdowns.
Now suppose a new investor decides to enter the fund at the second or some subsequent closing. He will be asked to pay a premium which will be allocated to all the LP's that were present in the previous closings.
This new LP will take a place in all the previous expenses as well as investments. He will be treated as if he was in the fund from the very start. This means that the other LP's investment holdings in the previous investments will reduce as they make place for this LP. Let us understand this with the help of numbers.
An equal percentage of drawdown will be taken from this new LP to get it on par with other LP's. The previous (before entry of new LP) allocation of expenses and investments at LP level are as follows:
CC
|
CC Ratio
|
Drawdown
|
Investment
|
Mgmt Fees
|
Deal Exp
|
Indirect Exp
|
Cash Balance
| |
LP 1
|
10
|
10%
|
2
|
1.50
|
0.2
|
0.10
|
0.10
|
0.10
|
LP 2
|
20
|
20%
|
4
|
3.00
|
0.4
|
0.20
|
0.20
|
0.20
|
LP 3
|
30
|
30%
|
6
|
4.50
|
0.6
|
0.30
|
0.30
|
0.30
|
LP 4
|
25
|
25%
|
5
|
3.75
|
0.5
|
0.25
|
0.25
|
0.25
|
LP 5
|
15
|
15%
|
3
|
2.25
|
0.3
|
0.15
|
0.15
|
0.15
|
100
|
20
|
15
|
2
|
1
|
1
|
1
|
CC
|
CC Ratio
|
Drawdown
|
Investment
|
Mgmt Fees
|
Deal Exp
|
Indirect Exp
|
Cash Balance
| |
LP 1
|
10
|
7%
|
2
|
1.00
|
0.2
|
0.07
|
0.07
|
0.67
|
LP 2
|
20
|
13%
|
4
|
2.00
|
0.4
|
0.13
|
0.13
|
1.33
|
LP 3
|
30
|
20%
|
6
|
3.00
|
0.6
|
0.20
|
0.20
|
2.00
|
LP 4
|
25
|
17%
|
5
|
2.50
|
0.5
|
0.17
|
0.17
|
1.67
|
LP 5
|
15
|
10%
|
3
|
1.50
|
0.3
|
0.10
|
0.10
|
1.00
|
LP 6
|
50
|
33%
|
10
|
5.00
|
1
|
0.33
|
0.33
|
3.33
|
150
|
30
|
15
|
3
|
1
|
1
|
10
|
One thing to be noted is that the Management fees total amount was increased because this fees is calculated as a percentage of LP's Capital Commitment. So others previous and new Management Fees was the same, just the new Management Fees of the new LP got added to those.
Now as the new LP gets a part in all the old investments, whose value must have increased over the time. The new LP takes part in them and the holdings of old investors is reduced in it, as we can confirm with the above numbers.
To compensate the old LP's for reduced share in these investments and for the increased value of these investments, the fund charges Premium Amount to that LP which is allocated to other LP's why were present in the previous closing. This amount is generally a percentage of amount contributed by the LP in that closing and is generally mentioned in the Contribution Agreement.
But practically what we have seen is, the AMC waives premium charges to the incoming LP to maintain good relations with the new investor.
Now let us understand Late fees Income for the fund.
Whenever a drawdown call is sent to LP's, it goes with a call date (when the drawdown is generated) and a due date (deadline for the amount to be paid). If an LP pays after the due date, he is subjected to pay a Late Fees which is allocated to other LP's. In some rare cases, we have seen that this income is allocated to all the LP's including the one who pays it. And in practical scenario, this fee is generally waived by the fund to maintain good investor relations.
General Indirect Income
Other Indirect Incomes can be generated through some short term investments that the fund must have made with the extra cash lying with it, before that was invested in the portfolio companies.
