How to read an AIF private placement memorandum (PPM)

An Alternative Investment Fund asks for a large commitment, usually at least ₹1 crore, locked up for years. The private placement memorandum (PPM) is where the terms are written down. Here is how to read one in the order that protects you.

Start with the category and the strategy

SEBI registers AIFs in three categories. Category I funds invest in areas the government wants to encourage, such as start-ups, SMEs and infrastructure. Category II covers most private equity and private credit funds. Category III funds trade listed securities and can use leverage. The category tells you the risk, the tax treatment and how liquid the fund will be.

The ten things to check

1. Strategy and concentration limits. What the fund can and cannot buy, and how much it can put into one company.
2. Tenure and extensions. The stated life of the fund and how many extensions the manager can take, and with whose approval.
3. Commitment and drawdowns. How capital is called and the penalty for missing a drawdown.
4. Management fee. The rate, and whether it is charged on committed capital or on invested capital.
5. Hurdle rate and carried interest. The return investors must get before the manager shares profits, and whether there is a catch-up.
6. Other expenses. Set-up costs, fund expenses and placement fees charged to the fund.
7. Sponsor and manager commitment. How much of their own money is in the fund alongside yours.
8. Conflicts of interest. Co-investments, deals with associate entities and how allocation between funds is decided.
9. Valuation and reporting. Who values the portfolio, how often, and what you receive each quarter.
10. Key person and removal clauses. What happens if the named investment team leaves, and whether investors can replace the manager.

Red flags

• Fees on committed capital for the full life of the fund with no step-down.
• A low or no hurdle rate with full catch-up.
• Wide discretion to invest in associate or promoter-linked companies.
• Track record shown only for selected deals, or gross rather than net of fees.
• Unlimited tenure extensions at the manager’s discretion.

DRHP Lens reads AIF PPMs and flags these terms with page citations, alongside DRHPs, NCD prospectuses and annual reports.

This guide is general education about how Indian offer documents are structured. It is not investment advice or a recommendation to subscribe to any issue. Regulations change; always read the current offer document and the SEBI regulations it refers to, and consult a SEBI-registered investment adviser before you invest.