Views on improving the integrity of global capital markets
16 April 2024

CFA Institute Forms Working Group to Address Performance Calculations of Private Funds

Why was the working group formed?

The Securities and Exchange Commission (SEC) issued the Private Fund Adviser Rules in August 2023. One of these rules, the private fund quarterly statements rule (Quarterly Statement Rule), requires advisers of private funds to report performance information to investors on a quarterly basis. The Quarterly Statement Rule has a compliance date of 14 March 2025.

Working alongside CFA Institute staff, the Working Group’s objective is to provide the industry with guidance on how the required performance information can be calculated. 

Who is on the working group?

The working group is composed of 17 members, representing small and large asset managers, fund administrators, consultants, lawyers, accountants, and asset owners. We believe having a diverse group of individuals will bring a different perspective to the final guidance that is issued.

What type of performance information is required by the Quarterly Statement Rule?

The Quarterly Statement Rule requires different performance information, depending on whether a private fund is a liquid fund or an illiquid fund. An illiquid fund is defined as a private fund that is not required to redeem interests upon an investor’s request, and has limited opportunities, if any, for investors to withdraw before termination of the fund. Examples of illiquid funds include private equity funds and closed-end real estate funds. Liquid funds are defined as all private funds that are not an illiquid fund. In most cases, hedge funds would qualify as liquid funds. 

Liquid Funds

For liquid funds, the following time-weighted returns are required:

  • Annual net total returns for each fiscal year over the past 10 fiscal years, or since inception, whichever time period is shorter;
  • Average annual net total returns over the one-, five-, and 10-fiscal-year periods; and
  • The cumulative net total return for the current fiscal year as of the end of the most recent fiscal quarter covered by the quarterly statement.

Illiquid Funds

For illiquid funds, 16 returns and metrics are required. This information is calculated since inception of the private fund, through the end of the quarter covered by the quarterly statement:

Fund-level with the impact of subscription facilities:

  • Net internal rate of return (IRR)
  • Gross IRR
  • Net multiple of invested capital (MOIC)
  • Gross MOIC

Fund-level without the impact of subscription facilities:

  • Net IRR
  • Gross IRR
  • Net MOIC
  • Gross MOIC

Realized portion of the fund’s portfolio with the impact of subscription facilities:

  • Gross IRR
  • Gross MOIC

Realized portion of the fund’s portfolio without the impact of subscription facilities:

  • Gross IRR
  • Gross MOIC

Unrealized portion of the fund’s portfolio with the impact of subscription facilities:

  • Gross IRR
  • Gross MOIC

Unrealized portion of the fund’s portfolio without the impact of subscription facilities:

  • Gross IRR
  • Gross MOIC

The Quarterly Statement Rule also requires an adviser to provide a statement of contributions and distributions that reflects all cash flows of the fund, to and from the investors, since the fund’s inception, with the value and date of each cash flow, along with the fund’s net asset value as of the end of the reporting period.

Which topics are being addressed?

On the surface, it seems that the performance information required by the Quarterly Statement Rule is straightforward. We have found, however, that the devil is in the detail, and there are no standard practices for how the required performance measures should be calculated. We are working our way through a variety of issues, including:

  • What must be deducted when calculating net IRRs and net MOICs;
  • Treatment of fees and expenses for fund-level and asset-based leverage;
  • Whether returns for the realized and unrealized portions should be calculated using a top-down or bottom-up approach; and
  • Which expense items should be added back to calculated Gross IRRs and Gross MOICs.

Throughout all of our work, we are considering differences between the requirements of the Quarterly Statement Rule and the SEC Marketing Rule, fund financial statements, and the GIPS® standards.

How you can help

If you work for a private fund manager and have specific topics you want us to cover, we would love to hear from you. Please send any questions or ideas to the GIPS Standards Help Desk at [email protected].

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Image credit: ©Getty Images/ RapidEye

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About the Author(s)
Krista Harvey, CFA, CIPM

Krista Harvey, CFA, CIPM, is a director on the Global Industry Standards team at CFA Institute. Previously, she held senior roles on Investment Operations and Performance teams at TIAA, Jennison Associates, and Goldman Sachs. Prior to joining CFA Institute, Harvey was a longtime volunteer. She chaired the United States Investment Performance Committee (USIPC) and was a member of the GIPS Standards Interpretations Subcommittee. Harvey also co-founded and co-chaired the CFA Society of New York Performance & Risk committee. She received a BA in economics from New York University.

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