A secondary sale includes future funding duties
Series XIX-A case study · set 3, case 2 of 5 · 4 questions · 1 mark each
Question 1 of 4Case practice
0 right · 0 wrong · 4 to go
The case · stays here for all 4 questions
An investor wants to sell an interest in Oak Fund. The latest reported net asset value of that interest is ₹80 lakh, and ₹20 lakh of its commitment remains uncalled. A buyer offers ₹68 lakh paid directly to the seller. The draft transfer documents say that, once the transfer is approved and completed, the buyer assumes all future calls on the transferred interest and the seller is released from those calls. Approval has not yet been granted. For this exercise, ignore fees and taxes, and assume no distribution or valuation movement before completion. The buyer is comparing the immediate purchase price with the maximum further funding commitment stated in the documents.
Transfer approval and release are contractual case facts, not a universal rule.
The full ₹20 lakh could be called after completion.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
An investor wants to sell an interest in Oak Fund. The latest reported net asset value of that interest is ₹80 lakh, and ₹20 lakh of its commitment remains uncalled. A buyer offers ₹68 lakh paid directly to the seller. The draft transfer documents say that, once the transfer is approved and completed, the buyer assumes all future calls on the transferred interest and the seller is released from those calls. Approval has not yet been granted. For this exercise, ignore fees and taxes, and assume no distribution or valuation movement before completion. The buyer is comparing the immediate purchase price with the maximum further funding commitment stated in the documents.
Transfer approval and release are contractual case facts, not a universal rule.
The full ₹20 lakh could be called after completion.
Q1At what discount to reported NAV is the ₹68 lakh offer?
Option A. 12%
Why it is wrong: This treats the ₹12 lakh difference as a percentage directly.
Option B. 15% — Correct answer
Option C. 20%
Why it is wrong: This is not the ratio of the price gap to ₹80 lakh.
Option D. 17.65%
Why it is wrong: This divides the discount by purchase price instead of reported NAV.
Answer: B. Discount = (₹80 lakh − ₹68 lakh) ÷ ₹80 lakh × 100 = 15%. The reported NAV is an estimate and does not guarantee a buyer will pay that amount. Remember: State the denominator used in a secondary discount.
Hint, shown before you answer in practice mode: Use reported NAV as the discount base.
XIXA-S3-C02-Q1mediumnumerical
Q2What is the buyer’s total cash outlay if the sale completes and every remaining call is made?
Option A. ₹88 lakh — Correct answer
Option B. ₹48 lakh
Why it is wrong: A future funding obligation is added, not subtracted.
Option C. ₹68 lakh
Why it is wrong: This omits the assumed remaining capital calls.
Option D. ₹100 lakh
Why it is wrong: This adds calls to NAV rather than to the purchase price.
Answer: A. Total cash outlay would be ₹68 lakh purchase price + ₹20 lakh future calls = ₹88 lakh. The two payments go to different parties and arise at different times. Remember: A secondary purchase can bring uncalled commitments.
Hint, shown before you answer in practice mode: Add the price paid to the seller and future calls paid to the fund.
XIXA-S3-C02-Q2easynumerical
Q3Can the seller already treat the uncalled commitment as discharged?
Option A. No. The approval and completion conditions have not yet occurred. — Correct answer
Option B. Yes, because the price is below NAV.
Why it is wrong: The price discount does not determine release from obligations.
Option C. Yes, because the buyer has made an offer.
Why it is wrong: An offer alone does not satisfy the stated transfer conditions.
Option D. No seller can ever be released after any transfer.
Why it is wrong: The draft explicitly provides release after approval and completion.
Answer: A. The release depends on an approved and completed transfer. Before those events, the seller should not describe a proposed assumption of calls as an obligation already discharged. Remember: Check when a transfer of obligations becomes effective.
Hint, shown before you answer in practice mode: Apply the conditions in the transfer documents.
XIXA-S3-C02-Q3easyapplication
Q4Which statement best explains why the offer is below NAV?
Option A. The buyer is guaranteed a 15% annual return.
Why it is wrong: A price discount does not specify exit values, timing or future calls.
Option B. A negotiated secondary price can reflect liquidity needs and valuation uncertainty. — Correct answer
Option C. All uncalled commitments disappear when an offer is made.
Why it is wrong: The case explicitly transfers those obligations only after completion.
Option D. A 15% discount proves the reported NAV is fraudulent.
Why it is wrong: A negotiated discount alone does not establish fraud.
Answer: B. A buyer may require a discount for an illiquid interest and uncertain underlying value. Future calls and eventual exits still affect the economic outcome, so the discount is not an annual return promise. Remember: A secondary discount does not by itself establish investment performance.
Hint, shown before you answer in practice mode: A price discount is not a guaranteed return calculation.
XIXA-S3-C02-Q4mediumapplication
Diversification must be checked at the underlying level
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