Operational Challenges with Performance Calculation and Reporting


Tanner Beverly

Publish Date




  • Compliance
  • Performance

As we noted in our Q3 Private Markets Quarterly Update, in 2021, we started to see early signs of significant expansion in the scope of SEC exams involving private markets fund managers, including requests for “details around information requested by, and provided to, specific limited partners (LPs) relating to a private fund’s performance and copies of any other type of customized Fund performance information provided to specific LPs (e.g., pursuant to a side letter provision).”

Further, we have noticed increased investor scrutiny around performance calculations and reporting by private markets fund managers, which only serves to reinforce the critical need for a more institutionalized approach in this area. This is also underscored by recommendations from ILPA for increased transparency and disclosure around various aspects of the IRR calculation1, specific internal rates of return (IRR) calculation and disclosure requirements included within the 2020 edition of the Global Investment Performance Standards (GIPS®) standards, the SEC’s new Marketing Rule, and the release of FINRA RN 20-21, which requires IRRs be calculated in accordance with the GIPS standards.

Such heightened investor scrutiny, combined with a flurry of multiple new regulatory requirements, inevitably increases operational burden and opportunity for error. In order to effectively handle these contractual, reputational, and regulatory risks, there are several key steps to create accountability and oversight that firms should take to strengthen their performance calculation and reporting processes.

Create Accountability and Oversight

Who should own the performance function? Across the private markets fund manager space, there is considerable variability in the roles and responsibilities of those charged with the calculation of performance results. We have seen fund accounting teams, investor relations, marketing, portfolio analytics, and even compliance professionals performing one or more aspects of these roles.

The performance measurement and reporting function touches all areas of the firm. The internal consumers of performance data (i.e., investor relations, marketing, portfolio management) and those performing the calculations (i.e., finance, accounting, portfolio analytics) must work together, and with compliance, to ensure that the performance information provided to investors is complete, accurate, and fully disclosed – both from regulatory and contractual perspectives.

While dedicated performance measurement teams are commonplace within the public markets, we have recently seen an early trend with certain private markets fund managers in expanding oversight of the performance measurement function by implementing policies and procedures around the performance calculation process. For all of the reasons noted, we anticipate this shift towards a more formalized and institutionalized approach will become increasingly mainstream in the coming months and years.

Develop a Performance Calculation Manual

Rule 206(4)-7 under the Advisers Act requires SEC-registered private fund managers to, among other things, adopt and implement written policies and procedures reasonably designed to prevent the violation of federal securities laws.

While many private markets fund managers have documented their policies related to the compliance review and approval of marketing materials, many private fund managers have been reluctant to adopt policies and procedures related to the details concerning the calculation and presentation of performance. One of the most common arguments against adopting such written policies and procedures is that firms believe such an approach would box them in and hamper their ability to diversify and evolve their performance reporting approaches in a fast evolving and highly competitive fund-raising environment. History has often proven these arguments to be generally invalid. For example, arguments made during the early years of Dodd-Frank in favor of informality in other areas (e.g., valuations and investment processes) are rarely advanced by seasoned private markets fund managers – they have accepted that such informality is no longer optional and come to embrace the formality required by investors and regulators alike over time.

While key performance metrics should be defined, the existence of these policies does not inherently limit advisors to the use of only the defined metrics. The key benefit here is to provide base level consistency in the calculation of standard reporting metrics (i.e., net fund IRR, MOIC, etc.) which are likely included in most marketing materials and offering documents.

Documenting a private markets fund manager’s current calculation process is a critical first step toward managing a performance measurement function capable of ensuring consistent and accurate results.

One of the weakest points of the performance calculation process is often the implementation of technology. Many private market fund managers spend a significant amount of time updating clunky templates on a quarterly basis, or simply creating a new file to suit their immediate needs. In many cases, changes to templates over time are not recorded or reviewed. In addition, there is generally great difficulty in systematically ensuring that all periodic processes necessary are completed in order to update these spreadsheets successfully. Issues can accumulate and become very costly to these firms.

At a larger private markets fund manager, where multiple fund accounting teams are typically responsible for calculating and presenting performance returns, each of these teams is often utilizing its own custom calculation templates, which can differ from those used by other fund accounting teams. This can lead to inconsistent implementation assumptions from fund to fund (or strategy to strategy) within the same firm. This also inherently creates additional compliance obligations as the disclosures must be reviewed for each different calculation template to ensure they accurately represent the methodologies and assumptions employed and are appropriately consistent to pass regulatory muster.

At small and medium-sized private markets fund managers, the likelihood of material errors in the calculation and presentation of performance increases due to the performance measurement and reporting function being siloed to a single employee (such as a fund controller or other type of accountant). One example illustrating these risks is that of a private markets fund manager who placed reliance on intricate calculation templates and models built by a member of the accounting staff several years prior to the identification of an error in their performance calculations, which was identified by the firm while compiling responses to examination requests from the SEC. The accountant ultimately left the firm (largely taking with him the how and why of these templates and models). Consequently, the successor employee was unable to implement the performance calculation processes consistently and accurately resulting in material discrepancies in the calculation of most track records of the firm. The remediation in this eventually required the firm to disclose the error to investors and resulted in significant legal and reputational costs.

Implement Third-Party Review

While implementing an internal audit review process and/or upgrading technology may be prohibitively expensive for many private markets fund managers, retaining a third-party firm that has deep expertise with private markets performance reporting to conduct an independent review of the methodologies, assumptions, and calculation templates currently in use can be an efficient and cost-effective control process. Whether due to increased pressure from investors and/or the SEC (or for other reasons), we are seeing an increased number of private markets fund managers of all sizes and shapes engaging in such third-party reviews (on a one-off or periodic basis). The typical structure of an independent review includes conducting interviews with personnel responsible for all aspects of the performance calculation and reporting process, recalculating fund and deal level performance information, testing the inputs and assumptions as described by a private markets fund manager against third-party records, and providing feedback on the firm’s policies in relation to industry and peer group best practices (including changes in practices driven by an evolving regulatory landscape).

How we help

We have a variety of services to help private markets firms comply with advertising regulations and performance requirements.

For firms that do not want to fully comply with the GIPS standards, ACA offers focused performance reviews to help them meet the FINRA 20-21 requirements. Focused performance reviews provide consulting on what it means to be consistent with the GIPS standards with respect to IRR calculations as well as insights on GIPS-required metrics and the associated calculation methodologies. 

For firms choosing, or considering, a full transition to the GIPS standards, ACA offers:

  • GIPS Feasibility Study: GIPS standards feasibility study to quantify the scope and effort to become GIPS compliant. This service assists a firm in identifying the gaps to GIPS compliance.
  • GIPS Compliance and Verification: GIPS compliance consulting and verification to provide internal and external assurance.

Please reach out to your ACA consultant or contact the Private Markets Team if you have any questions about this article, or want to find out how ACA can help your firm meet their performance reporting requirements.

Download our Private Markets Quarterly Update

This is just one of many insightful articles included in our Q4 2021 Private Markets Quarterly Update. Download the full newsletter to learn about:

  • Recent SEC Public Remarks Signal Desire for Comprehensive Reevaluation of Private Markets Regulation
  • Best Practices for Building and Implementing a Private Markets Compliance Program
  • Insider Trading Focus: Multiple Recent SEC Charges Present Cautionary Lessons for Private Markets Fund Managers
  • SEC’s Recent Sweep Enquiries Into Electronic Communications
  • Custody Rule Focus: Noteworthy Recent Trends in SEC Examinations & Enforcement Actions
  • SEC’s New Marketing Rule: An Update
  • Noteworthy SEC Enforcement Actions The UK National Security and Investment Act of 2021
  • Potential Ramifications of the SEC’s Novel Shadow Trading Theory
  • Compliance Challenges for Open-End Real Estate Vehicles
  • ESG Update: UNPRI’s Next Reporting Period Delayed Until Early 2023

1 ILPA Principles 3.0 https://ilpa.org/wp-content/uploads/2019/06/ILPA-Principles-3.0_2019.pdf