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Newsletter: Impact of Credit Lines on Carry

In Part I of this publication, we have discussed the impact of subscription lines of credit on the Net IRR and the potential distortion of the ‘Fee Drag’ (resulting in a negative ‘Fee Drag’) rendering the Gross IRR/Net IRR analysis in certain situations quasi-useless due to the fact that the Net IRR may turn out to be higher than the Gross IRR, in addition to the time mismatch between Gross and Net IRRs.

Click here to read part II where we discuss the impact of subscription lines of credit on carried interest.

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AcordIQ’s Chapter in The Definitive Guide to Carried Interest

To find out how new technology is enabling LPs to verify GP-reported carry, read AcordIQ’s chapter in The Definitive Guide to Carried Interest, published in October 2017 by PEI. The book is full of guidance and best practice approaches to demystify carry, aid understanding, and help practitioners peel back the layers of the calculation. The book is available to buy from the PEI Bookstore. Make sure you quote AUT_CI to get a 15% discount.

Here is an excerpt from the chapter…

How new technology is enabling LPs’ to verify GP-reported carry

By Charles Dooley, AcordIQ

Introduction

Investors entrust fund managers with billions to invest in private equity on the promise of high returns. As a reward, GPs typically retain 20 percent of the LPs’ profits (and cash) in the form of carry.

Carried interest is paramount to GPs. It is their reward for a job well done. Yet the calculation of carry (the waterfall), as other chapters in this book have already demonstrated, is extremely complex. A major point of concern among LPs is the lack of accurate information available on carry and other fees.

Few LPs have the requisite data, systems, resources and carry expertise to independently verify carry and fee charges as reported by GPs. Even fewer can do it in scale against their total private equity portfolio and the number of funds that ideally need to be verified. For that reason, most LPs simply accept the information reported to them by their GPs.

LPs that attempt verification are typically limited in terms of the scope of what they can do themselves: for example, an ad hoc, sample fee audit that is part of an end-of-year financial audit performed by an accountant and/or lawyer, focusing on a small number of funds in the portfolio, which have simple arrangements and using one to two years of data rather than from inception to date. Such limitations can have significant implications for the accuracy of the cost and performance information LPs provide to their key stakeholders (such as boards, trustees, the public), and it carries potential reputational and compliance risk if errors emerge.

The good news is that new advancements in technology, best practices and industry standardization, together with a growing market demand for greater intelligence, transparency and governance, can empower LPs with improved operational efficiency, comprehensive data collection and analytics, enhanced reporting capabilities, the ability to satisfy highly specialised business needs within their operating models, such as the capacity to unravel private equity fees and carry. Fees and carry are examples of a highly specialised business area.

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NYTimes: Calpers Paid $3.4 Billion to Private Equity Firms

For years, state pension funds have invested money earned by teachers, firefighters and other government employees with private equity firms without having a full picture of how much they were earning and what they were paying in expenses.

On Tuesday, the California Public Employees’ Retirement System disclosed for the first time that it had paid $3.4 billion since 1990 to the biggest private equity managers on Wall Street, including like firms like Carlyle, Blackstone and Apollo. Calpers also said it had made $24.2 billion in profits from private equity firms over the same period, according to its new data-collecting program, called Private Equity Accounting and Reporting.

The move by Calpers, the country’s biggest state pension fund, to disclose the details of its investment profit — called carried interest — could help to pave the way to more transparency in the private equity industry, historically one of the most secretive corners of the financial world.

“Private equity is a complicated asset class and the board and investment office staff will now have even more insight into our program,” Henry Jones, Calpers’s board vice president and the chairman of its investment committee, said in a statement on Tuesday.

Read the full story here.