A spin-out raises its first fund on a record earned elsewhere. The selection of deals moves the IRR more than the deals themselves.
An attributable track record pools the cash flows of every deal the team led or co-led at its previous firm, losses included, and computes MOIC and IRR on that pool. On an illustrative ten-deal fund returning 1.63x and 9.2 per cent, the spin-out team's six lead or co-lead deals return 1.65x and 9.3 per cent. Showing the four lead-only deals instead lifts the IRR to 14.4 per cent, and keeping only the realised winners to 20.3 per cent: the same team, three different records, and only the first holds up when LPs rebuild it.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every spin-out raises its first fund on a track record earned somewhere else. LPs know this, and the first thing a due diligence team does with a spin-out deck is rebuild the attributable record from the old fund's deal list and compare it with the one presented. Getting the selection right before the roadshow is an investor relations job, and the arithmetic is simple.
| Deal | Year in | Invested | Year out | Value | MOIC | Team role |
|---|---|---|---|---|---|---|
| Deal 1 | 2015 | 40.0 | 2020 | 110.0 | 2.75x | Lead |
| Deal 2 | 2015 | 30.0 | 2019 | 45.0 | 1.50x | None |
| Deal 3 | 2016 | 50.0 | 2021 | 20.0 | 0.40x | Co-lead |
| Deal 4 | 2016 | 35.0 | 2022 | 95.0 | 2.71x | None |
| Deal 5 | 2017 | 45.0 | 2023 | 120.0 | 2.67x | Lead |
| Deal 6 | 2017 | 25.0 | 2020 | 5.0 | 0.20x | None |
| Deal 7 | 2018 | 40.0 | 2024 | 70.0 | 1.75x | Co-lead |
| Deal 8 | 2018 | 30.0 | 2026 (NAV) | 45.0 | 1.50x | Lead |
| Deal 9 | 2019 | 50.0 | 2026 (NAV) | 80.0 | 1.60x | None |
| Deal 10 | 2019 | 35.0 | 2025 | 30.0 | 0.86x | Lead |
"Lead" means a member of the departing team ran the deal: sourcing, investment committee, board seat, exit. "Co-lead" means a team member was one of two senior people on it. The roles have to come from documents, investment committee memos and board minutes, because the old firm and the LPs will check them.
Pooled MOIC = Σ value ÷ Σ invested, over the selected deals
Pooled IRR = IRR of the summed cash flows of the selected deals, year by year
Never average the deal IRRs: a two-year deal at 50 per cent and a seven-year deal at 10 per cent do not make a 30 per cent record. In Excel, lay the deals out in rows and the years 2015 to 2026 across, with investments negative and exits or NAVs positive, sum each year in a total row, and take =IRR(total row).
Unrealised deals enter at their latest valuation as if received at the valuation date, which is how a gross IRR is normally stated; they should be flagged as unrealised in the presentation.
| Selection | Deals | Invested | Value | MOIC | IRR | Loss ratio |
|---|---|---|---|---|---|---|
| Whole fund | 10 | 380.0 | 620.0 | 1.63x | 9.2% | 28.9% |
| Lead or co-lead (attributable) | 6 | 240.0 | 395.0 | 1.65x | 9.3% | 35.4% |
| Lead only | 4 | 150.0 | 305.0 | 2.03x | 14.4% | 23.3% |
| Lead only, realised winners | 2 | 85.0 | 230.0 | 2.71x | 20.3% | 0.0% |
The loss ratio is invested capital in deals worth less than cost, divided by total invested. The attributable record covers 63.2 per cent of the fund's capital and performs almost exactly like the fund, 0.1 points of IRR better. Dropping the two co-led deals, one of them the fund's largest loss, adds 0.39x of MOIC and 5.1 points of IRR. Dropping the unrealised deal and the remaining loss as well adds a further 5.8 points.
Some teams argue that a co-lead should count for half. Weighting the two co-led deals at 50 per cent of their invested capital and value gives 195.0 invested, 350.0 of value, 1.79x and 11.3 per cent. That is a defensible presentation only if it is applied symmetrically, to the co-led winner as well as the co-led loss, explained in the footnotes, and shown next to the unweighted figure. Here the weighting happens to help, because the two co-led deals together only returned their cost, 90.0 invested for 90.0 back; a team whose co-leads were its best deals would never propose it.
The lead-only record is the one teams want to show, and 14.4 per cent against 9.3 is a real difference in a fundraising market where quartile cut-offs are a few points apart. But the departing team sat on the investment committee for Deal 3 and co-ran it; LPs who rebuild the record from the old fund's reports will find it, and the gap between their number and the deck's becomes the story of the meeting.
The regulatory test points the same way. Under the SEC Marketing Rule, an adviser may advertise a predecessor's performance only if the people primarily responsible for it manage accounts at the new firm, the accounts are sufficiently similar, all accounts managed in a substantially similar way are included unless leaving them out would not result in materially higher performance, and the advertisement says clearly that the record is a predecessor's. A selection of deals from one fund is also extracted performance, which may only be shown with, or with an offer to provide, the performance of the whole portfolio it came from. Moving from 9.3 to 14.4 per cent by leaving out co-led deals is the kind of selective presentation these conditions are aimed at. Whatever the jurisdiction, the attributable pool with every loss in it is the number to lead with.
A record split into its realised and unrealised parts is worked in splitting a track record into realised and unrealised IRR, and the loss ratio in how to calculate a loss ratio for a track record.
Define roles from documents, pool every deal the team led or co-led, losses and unrealised deals included, and compute MOIC and IRR on the pooled cash flows: 1.65x and 9.3 per cent here, close to the old fund's own result. Show any narrower or weighted cut beside it, never instead of it. Private Equity Investor Relations sets out how to present a fund's numbers to LPs, and the free workbook for the book puts the arithmetic of performance disclosure into formulas.
A deal in which a member of the team had a documented senior role, usually lead or co-lead: investment committee sponsor, board seat, ran the exit. In the illustrative case six of ten deals qualify, 240.0 of 380.0 invested, 63.2 per cent of the fund's capital. Roles should be evidenced by memos and minutes, because LPs will rebuild the list from the old fund's reports.
It can show a narrower cut, but not instead of the full attributable pool. Leaving out the two illustrative co-led deals lifts the record from 1.65x and 9.3 per cent to 2.03x and 14.4 per cent. Under the SEC Marketing Rule, a subset of deals from one fund is extracted performance, shown only with, or with an offer of, the whole fund's record, and LP due diligence applies the same logic in practice.
No. Pool the cash flows of the selected deals year by year and take one IRR of the total, and divide total value by total invested for the MOIC. In the illustrative attributable pool that gives 9.3 per cent and 1.65x. A simple average of the six deal IRRs gives 6.0 per cent instead: it weights a small, fast deal like a large, long one, and it can miss in either direction.
This article is one calculation from Private Equity Investor Relations. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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