The manager's figure and yours can both be right; the gap is two choices, the dates and the carry basis, and you can measure each one.
List every contribution as a negative and every distribution as a positive on the date it actually settled, add the closing capital account balance, net of accrued carried interest, as a final inflow at the statement date, and run XIRR. On an illustrative account with 9,000,000 paid in, 4,200,000 received and 6,900,000 remaining, that gives 7.38 per cent and 1.23x. The manager reports 8.7 per cent and 1.28x, and neither number is an error.
Worked in full in How to Read a Private Fund's Financial Statements by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The capital account statement gives you everything you need to compute your own return: the dated calls, the dated distributions and the closing balance. Recomputing it is worth doing once a year, because the reported figure is struck on conventions you did not choose, and they tend to run in the same direction.
| Settlement date | Quarter-end date | Amount |
|---|---|---|
| 15 Mar 2021 | 31 Mar 2021 | −2,000,000 |
| 20 Sep 2021 | 30 Sep 2021 | −1,500,000 |
| 12 Apr 2022 | 30 Jun 2022 | −2,500,000 |
| 30 Nov 2022 | 31 Dec 2022 | 400,000 |
| 18 Jun 2023 | 30 Jun 2023 | −1,800,000 |
| 15 Dec 2023 | 31 Dec 2023 | 1,200,000 |
| 10 May 2024 | 30 Jun 2024 | −1,200,000 |
| 28 Oct 2024 | 31 Dec 2024 | 2,600,000 |
| 31 Dec 2025, closing balance | 31 Dec 2025 | 6,900,000 |
The closing balance of 6,900,000 is after 390,000 of carried interest accrued to the general partner, so the balance before carry is 7,290,000.
DPI = distributions / paid-in; RVPI = closing balance / paid-in; TVPI = DPI + RVPI
IRR: the rate r at which Σ flow / (1 + r)days/365 = 0
In Excel: =XIRR(amounts, dates) with the closing balance as the last amount on the statement date. Not =IRR(), which assumes equal periods.
Step 1, the multiples. They need no iteration, so start there. Paid-in is 9,000,000 and distributions 4,200,000: DPI 0.47x, RVPI 0.77x, TVPI 1.23x.
Step 2, the rate. XIRR on the settlement dates with the net closing balance gives 7.38 per cent. That is your return: cash you paid, cash you received, and what your interest is worth after the carry the fund will pay at these values.
Step 3, reconcile to the reported figures. Test one convention at a time.
| Basis | IRR | Change | TVPI |
|---|---|---|---|
| Settlement dates, closing balance net of carry | 7.38% | 1.23x | |
| Quarter-end dates, net of carry | 7.50% | +0.12 | 1.23x |
| Quarter-end dates, gross of carry | 8.72% | +1.22 | 1.28x |
| Reported by the manager | 8.7% | 1.28x |
Dating every flow at quarter-end moves the rate by 12 basis points: most calls here settled well before the quarter closed, so pushing them later shortens the time your money appears to be out. Striking the terminal value before the accrued carry adds 122 basis points and lifts the multiple to 1.28x. Together they explain the reported figure to within 1.97 basis points.
The carry basis is 91 per cent of the gap even though the accrued carry is only 5.3 per cent of the residual value. A small change in the last flow moves the rate a long way when it is the largest flow in the series and comes at the end.
| Closing balance | TVPI | IRR |
|---|---|---|
| 6,000,000 | 1.13x | 4.43% |
| 6,900,000 | 1.23x | 7.38% |
| 7,500,000 | 1.30x | 9.20% |
With 62 per cent of the total value still unrealised, the rate is mostly a statement about the closing valuation. Every 600,000 to 900,000 of mark moves it by roughly two to three points, which is why the residual value is the line to question first.
Keep the manager's basis on file. Neither 8.7 per cent nor 1.28x is wrong; they answer a different question, the return before a carry that will in fact be paid. Record which basis each reported figure uses, so that next year's comparison is like for like.
The common mistake is to sum each calendar year's flows and run Excel's IRR. On this account that gives 9.21 per cent, overstating the return by more than either of the manager's conventions, because it treats every flow as if it landed on the same day of the year. The second mistake is to take the closing balance from the statement without checking whether it is before or after the carry accrual; the capital account usually shows both lines, and the difference here is worth 1.22 points. The full reconciliation of the balance itself is in how to reconcile a capital account statement.
XIRR the settlement-dated flows with the net closing balance: 7.38 per cent and 1.23x here. Then reconcile to the reported 8.7 per cent by changing one convention at a time. The case, with its dates and both terminal values, is in the free workbook for this case, with a blank version to run your own account.
Yes, if you want your own return. The accrued carry will be paid out of your share when the fund realises at these values. On the illustrative account the closing balance is 6,900,000 net and 7,290,000 gross; using the gross figure moves the IRR from 7.50 to 8.72 per cent on the same dates, 122 basis points, and the multiple from 1.23x to 1.28x.
Usually because of dating and the terminal value. Administrators often date flows at quarter-end when they lack settlement dates, which moved the illustrative return from 7.38 to 7.50 per cent. A terminal value struck before carry added a further 1.22 points. Together they explain all but 1.97 basis points of the gap to a reported 8.7 per cent.
Not reliably. Summing each calendar year's flows and running IRR treats every flow as if it fell on the same day each year. On the illustrative account that gives 9.21 per cent against 7.38 by XIRR on actual dates, an error larger than either of the manager's two conventions.
This article is one calculation from How to Read a Private Fund's Financial Statements. 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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