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.