First Close

Fund-raising does not end on one day. A manager gathers commitments over months, and at some point has enough to stop waiting and start investing. Declaring that point is the first close.

It is a commitment by the fund to proceed, and a signal to everybody still deciding. The manager keeps the right to accept further commitments and declare subsequent closes, up to a final close that ends fund-raising altogether.

The reason it matters far beyond fund-raising is that first close is the clock start for almost everything else in the fund's life. Tenure runs from it. Management fees accrue from it. Set-up costs amortise from it. Performance benchmarking begins a year after it. Get the date wrong and every subsequent calculation in the question is wrong.

The rules, from Chapter 17:

• Corpus at first close must be at least the scheme minimum of Rs 20 crore (Rs 5 crore for a social impact fund scheme).
• Timing. First close must be achieved within twelve months from the date of the SEBI communication taking the scheme's PPM on record. Miss it and the AIF must file a fresh application to launch — which, as Chapter 7 notes among the risk factors, can push deployment past a favourable market window. For a Large Value Fund the twelve months run from the date of grant of registration or the date of filing the PPM with SEBI, whichever is later. An angel fund must on-board at least 5 accredited investors before declaring first close, and refiles its placement memorandum if it fails.
• Sponsor commitment in the AIF at the date of first close cannot be reduced, withdrawn or transferred afterwards.
• Before first close an investor may withdraw or reduce a commitment, and the AIF may modify the scheme's tenure. After first close, neither.
• Open-ended Category III schemes: first close means the close of the Initial Offer Period.
• Tenure is computed from the first close date — minimum three years for Category I and II schemes, and whatever was fixed at registration for Category III.
• Benchmarking: a scheme that has completed at least one year from first close must report performance, cash-flow and valuation data to the benchmarking agencies, half-yearly on 30 September and 31 March data. Category I and II benchmarks are grouped by vintage year, which is set by the first close timeline.
• Final close ends fund-raising; the period between the two is set in the PPM and may be more or less than a year. Later investors get to see how the scheme has performed in between — an information advantage, not a penalty. A close-ended AIF can take no new investors after final close.

A green shoe option may be exercised before final close even where first close has already happened; the AIF Regulations have no express provision on it, but normal disclosure standards require it to be disclosed in the placement memorandum.

LMN Growth Fund I is a close-ended Category III AIF with a tenure of 5 years and total capital commitments of Rs 300 crore. It files its PPM with SEBI on 1 June 2023 and receives SEBI approval on 15 September 2023.

The workbook works this example as: first close on or before 31 May 2024, twelve months from the PPM filing date.

The manager declares first close on 15 November 2023, with commitments of Rs 210 crore — above the Rs 20 crore minimum corpus. Everything now dates from that day:

At 14 November 2028 the fund's total net assets are Rs 600 crore. The manager wants more time. Extension is available for up to two further years, in two one-year steps, each needing the approval of two-thirds of investors by value:

Two-thirds of Rs 600 crore  =  Rs 400 crore

So the manager must gather consent from investors holding units worth at least Rs 400 crore, sought before 14 November 2028. First extension to 14 November 2029; a second, if needed, to 14 November 2030. Without that consent, or at the end of the extended tenure, the fund is wound up.

Had the manager instead missed first close altogether by 31 May 2024, none of this would exist: the fund files a fresh application and starts over.

Chapter 7 (Alternative Investment Funds Ecosystem), section 7.1.9 introduces first and final close, and Chapter 17 (Regulatory Framework), section 17.6 carries the regulatory conditions and the worked tenure example. Chapter 9 ties the management fee and set-up cost amortisation to the date, and Chapter 10 ties benchmarking and vintage-year grouping to it. Expect a date-arithmetic question — given a PPM filing date and a tenure, compute the last permissible first close and the tenure end — and a two-thirds-by-value extension computation.

• The workbook is not internally consistent on where the twelve months start. Section 17.6.2 states that first close must be achieved within twelve months from the date of the SEBI communication taking the PPM on record, while the worked example in the same section counts twelve months from the PPM filing date of 1 June 2023 to 31 May 2024, even though SEBI approval came on 15 September 2023. Read the question carefully and use the date it gives you.
• Tenure runs from first close, not from SEBI registration and not from final close.
• The LVF rule is different: twelve months from registration or PPM filing, whichever is later.
• Extension consent is two-thirds by value of investment, not by number of investors — and it must be sought before the tenure expires.
• Sponsor commitment locks at first close. It cannot be reduced, withdrawn or transferred afterwards.
• An investor may walk away before first close and not after. The same asymmetry applies to modifying the scheme's tenure.
• Corpus at first close must clear Rs 20 crore, not merely the target the manager set for themselves.