Drawdown
The process by which the manager of a Category III AIF calls committed capital from investors as the fund needs it — also known as a capital call.
In plain language
Once investors have signed their capital commitments, the manager does not collect the full amount at once. It asks for money in instalments, when the fund has somewhere to put it. Each request is a drawdown, and the notices are capital calls.
The workbook puts it plainly: drawdown is the process by which the manager will call the capital commitment from its investors, as per the funding requirements and investment strategy of the fund, usually following the capital call schedule agreed in the contribution agreement.
Note the word. In this chapter "drawdown" means calling capital. The same paper uses maximum drawdown in Chapter 6 for a peak-to-trough fall in AUM — a completely different idea.
How it works
What the manager must spell out (Chapter 3, 3.3.3):
- Schedule of drawdown — the initial drawdown and the amount and timing of later ones during the commitment period. It can be a fixed periodic drawdown or on an "as-needed" basis.
- Notice period — the number of days investors have to pay, and the interest, penalties and further steps if an investor fails to honour a call.
- Investor class-wise schedule — the drawdown for each class of units and its timelines.
- Mode of drawdown notice — physical or email, or any other mode clearly communicated.
Capital invested and dry powder. Capital invested is the total amount drawn down for investment. What remains undrawn is called dry powder.
Where regulation stops a call. If an existing foreign investor stops meeting the SEBI conditions on foreign investors (IOSCO/bilateral MoU jurisdiction, not on the UNSC sanctions list, not in an FATF-identified jurisdiction), the manager shall not draw down any further capital from that investor until it meets them again.
The fund-raising sequence (Table 5.1): in-principle approval → take commitments but not money → Registration Certificate → first close with initial capital call → Step 7: remaining capital calls during the drawdown period → final close.
The formula
Capital invested (drawn down) = sum of all capital calls paid
Dry powder = Capital committed − Capital invested
Investor's share of a call = Call % × that investor's commitment
A worked example
The workbook's numbers. A Category III AIF scheme closes with total capital commitment of Rs 1,000 crore. Over time the manager issues drawdown notices totalling Rs 650 crore.
Invested capital = Rs 650 crore
Committed capital = Rs 1,000 crore
Dry powder = Rs 1,000 crore − Rs 650 crore = Rs 350 crore
Illustrative extension. Mrs Radhika Menon committed Rs 4 crore to the same scheme. The manager, investing on an as-needed basis, sends a notice calling a further 15% of commitments with a 10-day notice period:
Fund-wide call = 15% × Rs 1,000 crore = Rs 150 crore
Radhika's payment = 15% × Rs 4 crore = Rs 60 lakh
Fund invested after = Rs 650 crore + Rs 150 crore = Rs 800 crore
Dry powder after = Rs 1,000 crore − Rs 800 crore = Rs 200 crore
Because the call is as-needed, Radhika could not have predicted its date. The workbook's warning is exactly this: investors must keep enough liquidity to honour calls during the drawdown period, or risk failing a call through liquidity problems or mis-timing.
Why NISM asks about it
Chapter 3 (Introduction to the Category III AIF Ecosystem) defines drawdown and capital invested at 3.3.3 and gives the Rs 1,000 crore / Rs 650 crore illustration. Chapter 4 places drawdown terms in the contribution agreement. Chapter 5 (Regulatory Framework) places capital calls in the fund-raising process and bars further drawdowns from non-compliant foreign investors. Chapter 6 raises the investor-side cash management problem, and Chapter 10 lists co-ordinating capital calls and drawdown notices among a distributor's post-investment services.
Common exam traps
- Drawdown here is a capital call, not a loss. Maximum drawdown (Chapter 6) is a performance risk measure.
- Fixed periodic vs as-needed. Only the as-needed type makes call timing hard to forecast.
- Drawn plus undrawn equals committed. Dry powder is the undrawn part, not idle cash inside the fund.
- After in-principle approval a fund may take commitments but cannot call or accept money until it holds the Registration Certificate.
- Commitment period — the workbook gives two descriptions. Chapter 4 says commitment periods for close-ended funds typically range from 3–5 years from the final closing date; Chapter 5 says the commitment period is usually the first three years of the fund tenure (and tenure runs from first close). Know both.
- Total drawdowns can fall short of commitments, which the workbook says may lead to early termination of the fund.
Check yourself
1.Which risk-adjusted measure compares the risk premium per unit of systematic risk borne by the fund?
- a)Sharpe Ratio
- b)Treynor Ratio
- c)Maximum Drawdown
- d)Value at Risk
Show the answer
Answer: (b) Treynor Ratio
This is the workbook's own sample question. The word that decides it is systematic. The Treynor Ratio is (Rp – Rf) ÷ beta, measuring excess return per unit of systematic risk, which is not diversifiable. The Sharpe Ratio divides by standard deviation, that is by total risk. Maximum drawdown and VaR are downside-risk measures, not risk-adjusted return measures.
2.A Category III AIF has capital commitments of ₹1,000 crore, of which investors have paid in ₹800 crore. What is its PIC multiple, and what does it indicate?
- a)1.25 — investors have paid in more than they committed
- b)0.80 — the fund has distributed 80 per cent of the capital it called
- c)0.80 — the fund is near the end of its drawdown phase and has invested most of its committed capital
- d)0.20 — only 20 per cent of the commitment remains at risk
Show the answer
Answer: (c) 0.80 — the fund is near the end of its drawdown phase and has invested most of its committed capital
The PIC multiple ‘measures how invested the fund is. It is calculated by dividing the PIC by the Capital Commitments’: ₹800 crore ÷ ₹1,000 crore = 0.80, which is the workbook's own example. ‘A high PIC means that the fund is near the end of its drawdown phase and has invested most of committed capital’.
- 1.25 divides commitments by paid-in capital — the ratio upside down.
- Measuring distributions is the job of DPI (total distributions ÷ total capital contributions), not PIC.
- 0.20 is the undrawn share of the commitment, not the PIC multiple.
Where this is taught
- Series XIX-B · Chapter 3: Introduction to Category III AIF Ecosystemintroduced here
- Series XIX-A · Chapter 3: Concepts in Alternative Investment Funds Industryintroduced here
- Series XIX-E · Chapter 5: Alternative Investment Fund Ecosystemintroduced here
- Series XIX-D · Chapter 4: Alternative Investment Funds Ecosystemintroduced here
Related terms
- Capital CommitmentThe total amount an investor promises to contribute to a Category III AIF over the life of the fund — at least Rs 1 crore, or Rs 25 lakh for employees and directors of the AIF or its Manager.
- Default in DrawdownThe event of an AIF investor failing to pay a capital call. Other investors take up the call, and the defaulter substantially loses rights and returns under the investment agreement.
- Dry PowderThe part of a Category III AIF's capital commitments that investors have promised but the manager has not yet called — committed capital still waiting on the sidelines.
- PIC MultiplePaid-in capital divided by capital commitments — how invested a fund is. A PIC of 0.80 means 80% of commitments have been called; a high PIC means the drawdown phase is nearly over.
- Contribution AgreementThe agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
- Final CloseThe date that ends fund-raising for a Category III AIF scheme — after it, a close-ended scheme accepts no new investors, and only then may its units be listed.
- Maximum DrawdownThe largest peak-to-trough fall in a Category III AIF's AUM over a reporting period, quoted as a percentage of the peak — the worst loss an investor could have suffered in that window.
- Commitment PeriodThe window in a closed-ended fund during which the manager may call capital against commitments — and the period over which management fee is charged on committed rather than invested capital.
- Hurdle rateThe minimum return that must accrue to investors before the manager earns any incentive fee — the threshold that turns a fund's profit into the manager's profit.
- Invested CapitalThe total amount a Category III AIF's manager has actually drawn down from investors to make investments, as against the larger capital they committed. The undrawn balance is dry powder.
- CorpusThe total of all capital commitments raised by a Category III AIF scheme from its investors — not the cash actually collected, which SEBI requires to be at least Rs 20 crore.
- Over-commitment StrategyA deliberate cash-management approach where an institutional investor commits to more Category III AIFs than its current cash could cover if every capital call landed at once.
- SeriesA sub-division within a class of a Category III AIF's units — distinct and exclusive from any other series of the same class, created to identify a different set of investors, with its own NAV.
- Distributions to Paid-in CapitalCumulative cash actually distributed to investors divided by the capital they have paid in — the realisation multiple, and the one return measure a fund cannot flatter with its own valuations.
- Set-up CostThe one-time cost of forming the fund and issuing its units, charged to investors as a percentage of capital commitments — up to 1.5% or 2.5% — and usually amortised over the first 36 months.
- Blind poolA fund in which investors commit capital to the pool rather than to named deals — the manager chooses the investments afterwards, which is why the subscription agreement must settle everything in advance.
- Closed-ended AIFAn AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
- Temporary borrowingThe only fund-level borrowing Category I and II AIFs may do: for temporary funding needs, for no more than 30 days, on no more than 4 occasions a year, and up to 10% of investable funds.
- Total Value to Paid-in CapitalA fund's investment multiple: cumulative distributions plus the residual value of unsold investments, divided by paid-in capital — equivalently, DPI plus RVPI.
- J CurveThe shape of a private fund's returns over its life: negative in the early investing years because of fees, expenses and unripened investments, then rising steeply as exits and distributions arrive.