Under the AIF Regulations, it is mandatory for the sponsor/manager to have minimum capital commitment and continuing interest in the AIF.

The verification of the ownership structure and the commitment/continued interest would provide preliminary comfort to the potential investor before a fund due diligence is conducted. This is due to the fact that continuing interest provides the ‘skin-in-the-game’ for the manager and removes one of the main sources of mis-alignment of interests and moral hazard for the investors.

The main areas where alignment of interest between investors and the sponsors/ managers is required are – (1) Sponsor/manager commitment, (2) Management Fee and Additional Return / Carry terms including super-carry or higher carry after a higher preferred return,103 (3) Distribution Waterfall, (4) Catch-up and Clawback, (5) Competing or outside interests for the manager, (6) transparency and governance in fund structure and reporting, (7) related party transactions by fund / manager and (8) Co-investment opportunities.

Hurdle Rate of Return, or ‘Preferred Return’, is the threshold return that the investors in the AIF must receive, before the manager receives additional returns

Hurdle rate in the context of AIF investments is the rate of return from the fund that a fund manager has to achieve before being entitled to any additional return or incentive.

The investment team / manager presents the potential investee company with a non-binding Letter of Intent (LOI) also called the ‘Term Sheet’. 

The offer will detail a proposed transaction, investment amount, a proposed capital structure post-acquisition, board seat, key investor rights and management terms, exclusivity period, conditions precedent to investment and other residual matters.

Lets find the required Rate of return as per CAPM (Capital Asset Pricing Model)

CAPM = Risk free Rate + Beta * (Risk Premium)

CAPM = 8% + 1.3 x 9%

=  8% + 11.7%  = 19.7%

According to CAPM; required return is 19.7%.

Now expected return from the stock is 13%. (Currently trading at Rs. 100, is expected to touch Rs. 113 - This is a 13% rise).

Thus since expected return (13%) is lower than required return (19.7%) ; the stock is overvalued.

Investment Process Review – The entire management function that ranges from identification of investee companies till exits are made, decision-making process, checks and balances in decision-making, quality of research and methodologies and risk management practices are important in this segment of due diligence.

A 'Ratchet' is a performance-linked adjustment mechanism designed to protect investors and align interests in AIF investments.

The basic principle on which the ratchet operates is that in the event there is a ‘down round’ subsequent to the investor’s investment, the investor will be compensated by converting the preference shares into equity shares at the lowest issue price by the company.

Skewness is a statistical measure that quantifies the degree of asymmetry in the distribution of a dataset relative to its mean. In the context of investments, skewness is used as a risk measure to evaluate how returns deviate from a normal symmetric distribution.

Skewness as a risk measure provides insight into the asymmetry of return distributions, helping investors and portfolio managers identify potential risks and opportunities. A deep understanding of skewness is crucial for designing portfolios that align with the desired risk-return profile.

Large value funds for accredited investors may be permitted to extend its tenure upto 5 years, subject to approval of two-thirds of the unit holders by value of their investment in the large value fund for accredited investors.

The management fee structure is indeed one of the key disclosures in a PPM of an Alternative Investment Fund (AIF). The PPM is a comprehensive document provided to potential investors that outlines critical information about the fund, including its investment strategy, risks, fee structure, governance, and other terms.

The following document has to be submitted for registering an AIF -

The Memorandum of Association in case of a company; or the Trust Deed in case of a Trust or the Partnership deed in case of a limited liability partnership.

Therefore a Trust has to submit a 'Trust Deed' and not a partnership deed.