Realisation Risk

An AIF makes its money by exiting its investments well. That means selling at a good price, in a market with willing buyers.

Realisation risk is the risk that this exit environment gets worse. It can turn against the fund between the day it invests and the day it is ready to sell.

The workbook calls it a "change in exit environment". Note what it is not. It is not the risk that the business itself performs badly — that is a separate category. This one is about the market for exiting, not the company.

Realisation risk is one of the specific risk types SEBI requires an AIF to disclose under Regulation 22 of the AIF Regulations, which mandates transparency and periodic disclosure to investors. Under this regulation, an AIF must provide at least an annual report, within 180 days of the year end, covering material risks and how they are managed — including, alongside realisation risk, concentration risk, foreign exchange risk, leverage risk, strategy risk, reputation risk, and extra-financial risks including ESG factors.

The workbook specifically tags realisation risk as applying at both fund and investee company levels — a broad closure of the IPO window or a general M&A slowdown is a fund-level realisation risk affecting every portfolio holding at once, while a single investee company losing its most natural strategic buyer is a realisation risk specific to that one holding.

Meridian Growth Fund holds a portfolio of eight unlisted companies, three of which were expected to exit via IPO within the next 18 months. A sharp market correction closes the IPO window across the industry for an extended period.

This is a fund-level realisation risk: none of the three companies has become a worse business, but the exit environment — investor appetite for new listings — has deteriorated for all three at once, delaying realisations across a meaningful part of the portfolio.

Separately, one of Meridian's other portfolio companies had been expected to exit through a strategic sale to a single identified acquirer, but that acquirer is itself later acquired by a competitor and loses interest in the deal. This is a realisation risk specific to that one investee company — the fund's other seven holdings are unaffected.

Under Regulation 22, Meridian must disclose both instances of realisation risk, and how it is managing them, in its annual report to investors, due within 180 days of the relevant financial year end.

Chapter 10 (Fund Monitoring, Reporting and Exit), section 10.2.1, lists realisation risk directly within Regulation 22's mandatory annual disclosure list, alongside strategy risk and five other named risk categories. Expect realisation risk tested against its precise workbook gloss — "change in exit environment" — and against the parallel, easily-confused strategy risk, which the workbook glosses differently as "change in or divergence from business strategy".

• Realisation risk is about the exit environment changing, not the underlying business deteriorating. A portfolio company performing worse operationally is a different risk category from its exit market closing up.
• Realisation risk applies at both fund level and investee company level — a single company's buyer falling through is investee-level; an industrywide IPO window closing is fund-level.
• The Regulation 22 annual report is due within 180 days of year end — do not confuse this with the 6-month PPM audit reporting deadline used elsewhere in the AIF family, even though the two periods happen to be numerically close.
• Do not confuse realisation risk with strategy risk — both sit in the same Regulation 22 list, glossed with almost-parallel language, and are easy to swap under exam time pressure.