Warehousing of deals

Investors commit to a new AIF partly on the strength of what the manager says it will buy. A manager who can show a list of real, near-ready deals raises money faster than one with only a strategy document.

Warehousing of deals is building that list — a pipeline of investment deals — before the fund's first close. Nothing has been bought. The manager has identified, screened and perhaps begun negotiating with companies the fund intends to invest in once it has capital.

The workbook draws the line sharply against warehousing of investments, where securities are actually acquired and parked so they can be transferred later — a transaction that raises conflicts of interest the PPM must disclose.

The definition (Chapter 8, footnote 78). Warehousing, in the context of the PPM's conflicts-of-interest disclosures, means investment transactions made with an intention to park the securities for a period of time, so as to transfer or dispose of them at an appropriate later date; the investor acts either on behalf of an ultimate beneficiary or purely as a service provider. This shall not be confused with warehousing of deals, which means building a pipeline of investment deals before the first close of a fund is achieved.

Why managers build a pipeline (Chapter 10). One of the key attributes of a successful AIF manager is the ability to showcase an impressive pipeline of deals to back up the pitch for raising capital commitments. Category I and II managers typically demonstrate a potential deal pipeline by screening opportunities in line with the strategy stated in the PPM — screening that varies with the fund's marquee investors, since sovereign wealth funds and family offices have different risk-return objectives from HNIs.

Why first close is the reference point (Chapter 14, section 14.5.1). First close lets the manager test the fund's suitability for target investors and their response to the strategy; the sooner it is achieved, the better the chances of raising the full target. At first close the corpus must be at least Rs 20 crore, and the sponsor commitment at that date cannot afterwards be reduced, withdrawn or transferred.

How deals are sourced. Research teams, networking, deal scouts, co-investing, company visits, database screens, industry conferences and conversations with consultants and experts.

Setu Infra Credit Fund I (illustrative throughout) is a Category II AIF targeting commitments of Rs 300 crore.

Warehousing of deals — before first close. The manager's team spends six months building a pipeline and shows it to prospective investors:

No securities have been bought. The pipeline covers half the target fund. Investors commit Rs 110 crore, the fund declares first close (above the Rs 20 crore minimum), and it starts converting pipeline deals into investments.

Warehousing of investments — a different thing. Suppose instead the sponsor's group company had bought Rs 40 crore of the solar developer's debentures before first close, intending to sell them to the fund once it raised money. That is parking securities for later transfer — warehousing of investments — and the conflict of interest (price, timing, who benefits) must be disclosed in the PPM's conflicts section.

Chapter 8 (Legal Documents and Negotiations), section 8.5 on the PPM, its Section IX (Conflicts of Interest) and footnote 78 define both kinds of warehousing; Chapter 10 (Investment Process and Governance of Funds), sections 10.1 and 10.1.1 on deal sourcing and initial assessment stress the pipeline; Chapter 14 (Regulatory Framework), section 14.5.1 covers first close. Expect a question that asks which activity is warehousing of deals and which is warehousing of investments, and why only the latter is a disclosed conflict.

• Warehousing of deals = a pipeline before first close. No securities are bought.
• Warehousing of investments = securities parked for later transfer, and a conflict of interest to disclose.
• The reference point is first close, not final close and not registration.
• A strong pipeline helps fund-raising — the workbook calls showcasing it a key attribute of a successful manager.
• The PPM's conflicts section covers warehousing of investments and co-investments, not the building of a pipeline.
• Corpus at first close must be at least Rs 20 crore.