Private Equity Funds

SEBI sets the floor for any Alternative Investment Fund at ₹1 crore. A Category II fund cannot accept less from an ordinary investor. Employees and directors of the fund or its manager can come in at ₹25 lakh, and accredited investors have no minimum at all.

In practice the number that matters is not the floor but the fund's own ticket. Many private equity funds set theirs well above ₹1 crore, because a smaller number of larger investors is simpler to administer across a ten-year life.

No. You sign a commitment. The fund then draws it down in tranches, called capital calls, as it finds deals. A ₹1 crore commitment might see ₹15 lakh called in the first year and the balance over the next three or four.

This is the part people underestimate. The calls arrive on the manager's timetable, not yours, usually with a short notice period. Defaulting on one is expensive: the standard remedy in the fund documents is forfeiture of part of what you have already paid in. Before you commit, work out where the uncalled money will sit for four years and what it will earn there.

Fees and set-up costs are charged from the first year. Value creation in the underlying companies shows up much later, and unlisted holdings are marked conservatively until there is a transaction to mark them against. So the reported value of your account typically dips below what you have paid in, then recovers.

That shape is structural, not a warning sign in itself. What it means practically is that an early statement tells you almost nothing about the fund. The first genuinely informative data point is usually the first realisation.

Two layers. A management fee, often around 2% a year, and carried interest, which is a share of profits above a hurdle rate.

The layer that decides the number is the catch-up. Read “20% over a 10% hurdle” two ways. Without a catch-up, the manager takes 20% of the gains above the hurdle only. With a full catch-up, once the hurdle is cleared the manager takes 20% of the whole gain, hurdle included. Identical headline terms, several times the fee. Ask whether there is a catch-up before you ask anything about strategy.

Also ask whether the management fee is charged on committed capital or on capital actually drawn. In the early years, when most of your commitment is still uncalled, those two produce very different bills.

Category II is the unlisted, long-lock structure: private equity, private credit, real estate. It does not use leverage other than for day-to-day operating needs. Category III is the listed-market structure, and it may use leverage and derivatives.

The difference that reaches your return is taxation. Category II is a pass-through, so gains are taxed in your hands with the character of the underlying holding preserved. Category III is taxed at the fund level. It also changes what the manager must put in alongside you: the continuing-interest requirement is 2.5% of the corpus or ₹5 crore, whichever is lower, for Categories I and II, and 5% or ₹10 crore for Category III.

Category II AIFs are a pass-through. The fund does not pay tax on the gain; it is taxed in your hands, and it keeps the character it had inside the fund. For an unlisted company held beyond twenty-four months that means long-term capital gains at 12.5%.

The fund deducts tax at source on what it distributes, and issues you a statement each year showing your share of income by head. You reconcile that against your own return. Because income can be reported to you in a year in which you received no cash, the tax year and the cash year do not always line up. Plan for that.

Six things, in this order. The fund's tenure and how many extensions the manager can take unilaterally. The capital call notice period and the default remedy. Whether the management fee sits on committed or drawn capital. Whether carry has a catch-up. Whether the waterfall distributes deal by deal or only after the whole fund returns capital. And the key-person clause, which says what happens if the people you are backing leave.

A deal-by-deal waterfall pays the manager carry on early winners before the fund as a whole has returned your money. A whole-of-fund waterfall does not. Over a ten-year life that single line moves more money than the fee headline.

Not through the fund. There is no redemption window; the money returns as the manager sells companies. The only exit is a secondary sale of your interest to another investor, which needs the manager's consent, takes months, and prices at a discount because the buyer is taking on your remaining unfunded commitment as well.

Treat the lock-in as real. The test is not whether you can find ₹1 crore. It is whether you can commit it, meet calls on someone else's schedule, and not touch any of it for eight years without that changing another decision you make in the meantime.

Yes. Category II AIFs accept NRI capital, generally on a repatriable basis through an NRE account, and the structuring should be settled before you commit rather than at the first capital call.

If you are a US person, stop here and read the position on pooled Indian funds first. A Category II AIF is a pooled foreign vehicle for US tax purposes, and that changes the arithmetic materially regardless of how the fund performs.