Investors are slowly changing the way they assess fund manager performance.
They are increasingly relying on public market equivalents – rather than comparison of vintage year IRRs – said panellists at the CFOs and COOs Forum hosted by sister publication Private Equity International in New York.
Around 25 percent of investors are now using a public market equivalent as their policy private equity benchmark, said one executive with a view over a broad universe of LP private equity programmes.
In a Chatham House rules discussion, CFOs and investors discussed the issue of inconsistency among the ways in which performance is calculated by GPs and reported to investors.
The industry would benefit from “some degree of standardisation” in the way GPs calculate and report performance to investors. One private equity CFO commented that there is no reason that performance calculation methodology should not be consistent across all managers and “some clarity would be helpful for the industry overall”.
Significant variations in the way performance is calculated means that comparing one fund’s IRR with its vintage year peer group becomes problematic. Even if an LP is comfortable with the methodology behind the performance data for one fund, they may not be able to get comfortable that this is the same for the universe they are benchmarking against. They may even be using different definitions of vintage years.
LPs are increasingly asking for underlying granular cashflow data in order to calculate their own performance numbers, the executive noted.
Other takeaways on performance calculation:
- Credit facility terms have slowly grown longer. One CFO described their firm’s evolution from its original 90-day facility, to a 120-day facility and then to a 364-day facility in its most recent fund. The extension was both for the administrative ease of have a credit facility and the boost it can give to performance. Per an audience poll: the term length on most fund credit facilities is 180 days (34 percent) followed closely by 365 days or longer (31 percent).
- A minority of firms are boosting the TVPI on individual deals by realising proceeds from a portfolio company and then offsetting these against the contributed capital to the deal. In other words: a GP makes a $100 million investment in a company and an early recap returns $25 million. Instead of the $25 million counting as a distribution, it is offset against the original investment, meaning the original contributed capital is marked as $75 million. “We’ve seen a 2x deal become a 10x deal,” said one LP.
- The days of getting a nice valuation pop on exit are no more, said one LP. “We are seeing the marks being much closer to exit value, and a lot more volatility in the marks.”