Investor to Asset Manager: Where the Hell are My Returns?

Henry Jones, Calpers board Vice President and chairman of its investment board, recently stated “Private Equity is a complicated asset class and the board and investment staff will now have more insight into our program”. He couldn’t have been clearer: Institutional investors are pushing for higher transparency and the SEC is looking hard at various dubious practices — including how fees are being charged by specific funds.

Managing complex sets of assets in a portfolio is equally complex. Irregular cash flows; private nature of transactions; zero public market valuations; and low liquidity all amount to complex business management issues that are not easily solved.

When I was in the midst of figuring out critical reporting, most of the issues I faced would boil down to one simple question: Where is the data and how much can we trust it? The lack of strategic data systems, even in the large private equity management companies, compounds this problem still further.

The following example is a true story of a routine request made by an investor made to an alternative asset management company. It could have been easilysolved if we had access to the right data, at the right time.

The investor’s request was for their IRR’s (Internal Rate of Return); a return metric, for a specific asset, which had been a win for the fund. The request seemed innocuous enough, but as we dug deeper, we discovered that their particular asset was was part of a large, complex deal. The overall investment was made in one deal across multiple assets, across the capital structure. So in order to provide the IRR, we had to start aggregating the cash flows and timings across all those assets.

To complicate matters even further, someone realized that the initial deal had resulted in follow-on investments. As a result, there had been a reorganization of some of the share classes. The investor’s “simple” request was now consuming even more management time as we tried to get reconciled data and accurate returns — especially difficult as the asset had been allocated across multiple funds which meant that we needed to get cash flow data from each, and find the legal costs associated with each of the transactions.

Even before we had a chance to answer the investor’s initial request, they asked whether we could provide the Gross and the Net IRR for the deal as well. At this point I think we all just threw just threw in the towel.


Ironically, an IRR is not a complex calculation. But in this particular case, the data had not been organized and even if we could find it, we were never sure whether the data was accurate. In the end we wasted far more time reconciling and aggregating all of the details together then we spent actually analyzing the data.

This quixotic search for calculating returns even had a second wind. Almost as soon as the initial request had been signed off by all the concerned teams, and all the returns calculated and submitted, the investor came right back and — during a meeting with one of our portfolio analysts — announced that our numbers did not tally with another report that they had received. The scramble to reconcile the reported numbers became a worse scramble than 3rd and goal in the dying seconds of a football game.

However, we were thankful that the investor did not push us any further by asking for returns for all of deals done in that year.


This is just one example of the many kinds of different requests that investor relationship managers have to field from their clients. But the crucial issue always remains the same: Where is the data; who has recorded it; is it verified; and is it all at one place?

Most asset managers have grown their funds without having invested strategically in a data infrastructure management platform that keeps all of their portfolio, asset and deal data together in one place, so answering these questions quickly and accurately remains extremely difficult. Yet as investors demand ever increasing amounts of real-time transparency and reporting — and with increasing government oversight on the horizon — this issue is only ever going to get worse unless the business of alternative asset management updates it’s obsolete 20th Century technology and joins the rest of us living in the 21st.

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