You receive a statement from a private equity fund, then review your consolidated family office report. Both show a rate of return for the same investment, but the numbers differ.
Does that mean someone has made a mistake?
Not necessarily. Performance depends on which cash flows are included, when they’re recorded, what valuation is used, and how the return is calculated. A fund manager’s report and an investor’s own reporting may approach these questions differently.
In our work as a family office service provider, our starting point is the family’s experience: how much money left their accounts, when it left, how much came back, and what the fund reports their remaining investment is worth.
That perspective matters when assessing what an investment has actually delivered.
A few days can make a difference
Suppose a capital call is due on September 28. We arrange payment, and the money leaves the client’s bank account on September 25. The fund records the contribution as effective September 28.
Our records reflect when the family parted with the money. The fund’s records reflect its effective contribution date. An internal rate of return, or IRR, is sensitive to the timing of cash flows, so those dates can produce different results.
We could try to make every payment arrive precisely on its due date. But capital calls involve practical considerations: bank processing times, holidays, authorization requirements, and the possibility of an error that needs correcting. Allowing a reasonable margin helps ensure the payment arrives on time. We’ve gained this knowledge from experience.
The same issue can arise with distributions. A fund may record a payment before it reaches the investor’s bank account.
A few days will often have a modest effect, particularly over a long holding period. They should not automatically be used to explain a large discrepancy. But they illustrate why two otherwise sound calculations can differ.
Investors enter the same fund at different times
A fund may accept investors at an initial closing and at subsequent closings. An investor joining later may make a catch-up contribution and, depending on the fund’s terms, pay equalization interest or other adjustments.
That investor’s cash-flow history differs from that of someone who participated from the beginning. It also differs from the combined history of all investors.
This makes the scope of the reported return important. Is the statement showing performance for the entire fund, a particular investor class, or the family’s specific interest?
A fund-wide return since inception doesn’t necessarily describe the experience of a family that joined a year later. However, joining at a later closing does not, by itself, explain a difference between two calculations of that same family’s return using identical inputs.
Not every dollar called is invested in portfolio companies
A capital call may cover investments, management fees, operating expenses, or closing adjustments. So, the amount leaving the investor’s account may exceed the amount deployed into underlying businesses.
For the investor, these payments are part of the cost of participating in the investment. For the manager, their treatment depends on the performance measure being presented.
A gross investment return and an investor’s net return answer different questions. Even a return described as “net” needs context: which fees and expenses are included? Are there additional costs through a feeder fund or another investment structure?
Our own calculation also needs to avoid double-counting. An expense already reflected in the investor’s reported net asset value should not be deducted again simply because it appears separately in supporting documents.
IRR and time-weighted returns measure different things
Two percentages are not necessarily comparable just because both are labelled “return.”
IRR is a money-weighted measure: it reflects the amounts invested and distributed, their timing, and the value remaining at the end of the measurement period.
A time-weighted return seeks to remove the effect of external contributions and withdrawals by linking returns across periods. Calculating it accurately requires suitable valuations around cash flows, which can be challenging when private funds report values infrequently.
Multiples provide another perspective. Total value to paid-in capital, or TVPI, compares distributions plus remaining value with contributed capital. Distributions to paid-in capital, or DPI, focuses on what has been distributed. Neither tells us how long it took to achieve the result.
These measures work best together. An attractive IRR does not, on its own, tell a family how much cash has come back or how much of the reported value remains unrealized.
Other differences worth understanding
Several additional factors can cause our reporting to diverge from a manager’s statement:
| Valuation dates | Our report may use the latest available quarter-end valuation while the manager’s newer statement incorporates an updated value. |
| Reporting periods | A quarterly return, a year-to-date return, and an annualized return since inception cover different periods. |
| Currency | A fund’s US-dollar return can differ from the family’s Canadian-dollar return because of exchange-rate movements. |
| Investor terms | Fee discounts, different classes, and investment structures can produce different net outcomes within the same fund. |
| Revisions | Final or audited figures may replace preliminary valuations or allocations after an earlier report has been prepared. |
Valuation timing deserves particular attention. If we use a June 30 valuation in a later report, that date should remain visible. Subsequent contributions and distributions must be handled consistently; adjusting for those cash movements does not create a fresh market valuation.
Fund borrowing can change the timing picture
Some private funds use subscription credit lines to finance investments before calling capital from investors.
This can shorten the period during which investors’ cash is outstanding and increase reported IRR, even though borrowing costs reduce value. Industry guidance therefore distinguishes performance with and without the impact of subscription facilities.
This does not automatically explain a discrepancy. If both our calculation and the fund’s calculation use the same actual investor cash flows, both reflect the delayed capital calls. The distinction matters when one calculation adjusts out the facility’s effect or measures cash flows between the fund and its underlying investments.
Cash flows are the foundation
For an investor-level IRR, we don’t need to divide every distribution into income and returned capital before calculating the return. We need complete, correctly dated cash flows and an appropriate ending value.
Those classifications still matter for bookkeeping, tax reporting, and understanding what the fund has delivered. Returned capital is not the same thing as profit (or income).
Bank transactions also may not tell the whole story. An investment can distribute securities instead of cash, withhold taxes, or offset a distribution against a new capital call. These events need supporting documentation so the performance calculation captures the full economic activity.
There is another important limitation: independently calculating a return does not independently verify the fund’s valuation. Until investments are realized, our calculation still relies substantially on the values supplied by the manager.
Different can be reasonable
We should be able to explain a material difference between our reporting and a fund statement.
That means comparing the investor or fund being measured, the calculation method, reporting period, currency, cash-flow dates, fees, and ending valuation. If all those inputs and conventions are aligned, the results should generally reconcile, allowing for rounding.
Missing transactions, duplicate entries, stale valuations, and incorrect fee treatment are errors to resolve. They shouldn’t be dismissed as differences in perspective.
At the same time, changing our records solely to reproduce the manager’s headline return would undermine the purpose of independent reporting.
The families we work with demand a consistent view across their investments: what’s contributed, what’s received, what remains invested, and how those results developed over time. Such a view supports better questions about performance, liquidity, costs, and future commitments.
While the fund manager’s statement is an essential input. Our responsibility is to turn that information, together with the family’s own records, into a clear account of the family’s investment experience from an independent perspective. Increasing transparency and reducing fraud in the process.
