Understanding private markets contracts: an insightful analogy

January 5, 2024

Gregor Kreuzer

Chief Product Officer & Co-Founder

Once upon a time, in the era of the East India Company, a wooden ship was preparing for a long voyage. The ship symbolizes what we, in modern days, call an "Investment Fund". The captain, a General Partner (GP), was sturdy and wise, leading his crew members who were akin to the employees a GP would have today.

Before embarking on their journey, they needed resources to purchase goods from harbors. These resources came from investors, individuals who put their trust in the captain's judgment to make profitable trades. Yet they knew that investment carried risks; the captain might make wrong decisions or unforeseen disasters might occur causing them to lose their entire investment.

Preparations for this voyage were extensive - recruiting able-bodied sailors, stocking up provisions and much more. Just as in an investment scenario, there were costs associated with these preparations and ongoing costs during the voyage. It was decided by the investors whether they would pay these directly or allow the captain to deduct it from their share of profits.

A Limited Partnership Agreement (LPA), serving as a contract among all parties - captain, crew, and investors - was drawn up. This agreement comprised of everyone's responsibilities, financial obligations and how profits would be allocated. It was an essential element ensuring smooth operation and fair dealings among all parties.

At home port, merchandise to sell in foreign countries was selected by the captain, such as wool and herring. Much like our contemporary system where investors can influence specific actions, side letters are created. Here an investor was granted that all herring was bought from his company, but as this reduces his risk considerably, the preferred return, which covers the risk is reduced to zero. Another investor was allowed to buy wool himself, which is then sold alongside all the other wool, which is the equivalent of a co-investment in modern days.

Upon reaching a distant harbor and selling off their merchandise, proceeds were distributed amongst the investors. Factors such as initial investments made, coverage of ongoing costs during the voyage, preferred returns, side letters and captain's performance influenced this distribution. Some of the proceeds are as well allocated to the captain, which motivates the captain to seek out the best trading opportunities. Sharing part of his performance fees with his crew for collective effort ensures that everybody on board pulls in the same direction. To demonstrate his commitment and involvement in the venture, the captain reinvested in high-value goods using his share of the proceeds to maximize potential profits.

Keeping track of proceeds and ownership was crucial for the captain. For instance, the captain might reinvest in high-value goods using his share of the proceeds to demonstrate his commitment and involvement in the venture, or an investor could earn rebates if they provided valuable information leading to better purchases, adding another layer of complexity. At the times of the East India Company, all these calculations were done on paper and with the limitations on board of a ship.

Today's complexity has multiplied considerably from those sea voyages. However, thanks to specialized tools like qashqade, fund managers can focus on maintaining 'ship seaworthiness' or making sound investment choices rather than complex calculations. For more information on how calculations can be simplified using these tools, feel free to contact us.

White Paper: LPA Validation - trust but verify
Get one step ahead with qashqade: speak to our team today