Creating a private equity overview is not as simple as compiling key figures from different funds. In this article, we look into what you should be aware of when creating an overview of your investments.
Feb 11, 2024
Let's start with the "why".
Why is it important to have one consolidated overview of you private equity investments?
It's important for two main reasons.
Firstly, it's vital that you always have an overview of your total unfunded commitment. This ensures you know precisely how much the funds can call from you, determining the size of the liquidity buffer you need to meet their calls.
Secondly, a consolidated overview allows you to compare the results of your various private equity investments.
At Aleta, we possess an in-depth understanding of most private equity funds and their reporting practices. We leverage this knowledge to provide our customers with an accurate overview of their private equity investments.
In the following, I'll explain what you need to be specifically mindful of when creating your overview. My goal is to equip you with a solid foundation for maintaining an overview of your private equity investments and comparing their performance.
So, buckle up as we dive into seven key considerations for creating your own private equity overview.
Unfortunately, creating a comprehensive private equity overview isn't as straightforward as just compiling the key figures from the different funds you've invested in.
The private equity market isn't as regulated as the publicly traded market, where there are many rules for how and when companies must report, and what information they have to share.
There are no rules or common standards for how private equity funds report on their investments. This means it's largely up to each individual fund how they choose to report and calculate the various key figures.
As such, a significant part of the task of preparing a consolidated report for your private equity investments lies in ensuring that the key figures for the different investments are calculated on the same basis and that you're not comparing apples and oranges.
If this isn't ensured, you can't compare key metrics across the different funds.
One of the key benefits of creating a consolidated overview for all your private equity investments is getting an overview of your total unfunded commitment. In this context, it's crucial to be aware of whether you meet calls from the funds that don't reduce your unfunded commitment.
Calls that don't reduce your unfunded commitment can include costs such as management fees or interest expenses. Your Limited Partner Agreement (LPA) explicitly outlines whether costs reduce your unfunded commitment or not.
Management fees, for instance, can make up a relatively substantial portion over the lifespan of a fund. If this amount isn't factored into the commitment you initially made, it can have significant implications for the required liquidity you need to have readily available.
Let's take an example: A fund has raised 100 million and charges an ongoing management fee of 2% annually of the committed capital. In that scenario, 2 million will be earmarked for fund operations each year. Over a 10-year fund life, that adds up to 20 million in operational costs. If the fund deducts management fees from investors' unfunded commitments, the fund would’ve had 80 million to play with.
However, most funds don’t include management fees as part of investors' commitments. In this case, the fund would have the full 100 million to invest and additionally receive 20 million in management fees. This means that if you’d committed 1 million to this fund, you’d have to pay an additional 200,000 in management fees over the 10 years – which is 20% more than your initial commitment.
Therefore, it's crucial to be aware of which calls reduce your unfunded commitment, and whether you need an additional liquidity buffer to meet calls that exceed you original commitment.
It's important to note that some distributions can be recalled by the fund. The conditions under which recalls can take place are typically outlined in your Limited Partner Agreement (LPA). When a distribution is made, the fund will specify whether it can be fully or partially recalled.
If a distribution can be recalled, it means that you must be able to repay the distribution to the fund for the rest of the fund's lifespan if they recall it. Therefore, the amount must be added to your unfunded commitment, ensuring that the figure consistently reflects how much the fund can call from you.
Being aware of potential recalls is crucial for maintaining a precise overview of your financial obligations to the fund.
When creating your private equity overview, you should ensure that all expenses related to investments – and not just the contributions considered part of your commitment – are accounted for in your fund contributions.
If they aren't included, your return may appear higher than it actually is. By incorporating all expenses in the calculation of the performance metrics in the report, you get the most accurate picture of how your investments are performing.
If you've made investments using various currencies, remember to be aware of this when creating your overview.
An overview could look like the below example with four funds.
Make sure to include Market Value in both the currency you invested in and your local currency. Commitment, unfunded commitment, contributions (Paid in) and distributions (Paid Out), and Return should all be converted to your local currency to keep your entire report in one currency. This allows you to maintain an overview of your unfunded commitment in a single currency.
When converting to your local currency, consider the value of the various contributions and distributions at the time of transfer, not their current value when you're preparing the report. For instance, the current value of a EUR distribution in USD doesn't matter if you got it a year ago and spent it then.
The most accurate report reflects the value of contributions and distributions at the time of transfer.
If you've hedged parts of your currency exposure, you should also include this in your overall results.
Note: There may be cases where it makes more sense to keep the key figures for a fund in the currency you invested in.
For instance, if you want to compare the funds' performance, retaining the fund's key figures in the currency you've invested with provides the most accurate picture.
However, in a consolidated private equity overview across funds, all key figures must be in the same currency. And if you want to know how much you have gained from your investment, you should convert other currencies to your local currency.
Mistakes happen – even in private equity funds. Therefore, it's essential that you don't take their reports at face value – instead, you should verify that the numbers align with reality.
Pay special attention to whether the fund has deducted all your contributions from your unfunded commitment. Only when you've ensured that your contributions match the numbers reported by the funds, can you use the numbers in your own consolidated report. After considering sections 1, 2, 3, 4, and 5 in this article, of course.
Deciphering individual capital calls from the funds can be a time-consuming task. They often consist of various components that can be challenging to distinguish from each other. Therefore, grasping what is being called for and comprehending associated notes can be difficult.
To create an accurate overview, it's important that you interpret the fund's capital calls correctly.
There are many factors to consider when preparing a consolidated report for your private equity investments. Investigating them thoroughly and ensuring that all key figures across funds are calculated on the same basis can take a long time.
We can do it for you.
At Aleta, we have extensive experience in consolidated private equity reporting. Therefore, we have a good understanding of most private equity funds and their reporting practices. We use this knowledge to ensure that all figures in the reporting are calculated on the same basis.
With private equity reporting from Aleta, you always know precisely what the various funds can call from you and what their results have been.
This provides you with the overview and insight to make the best decisions for your investments.
Get in touch if you have any questions about the article or our private equity reporting.
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