Interpreting a track record
Three metrics anchor private market performance, and each answers a different question.
- IRR (internal rate of return) is time-sensitive and can be flattered by early distributions or by subscription credit lines that delay the first capital call.
- MOIC (multiple on invested capital) measures how many dollars came back, or are marked, per dollar invested, ignoring time.
- DPI (distributions to paid-in capital) measures actual cash returned to investors. It is the hardest metric to engineer, which is why limited partners increasingly weight it alongside MOIC when evaluating managers.22
Two disciplines make track records honest. First, compare funds only to vintage-year peers; a 2021 vintage and a 2016 vintage lived different lives. Second, discount recent vintages appropriately: funds take years to settle into a final quartile, and early marks are estimates, not outcomes. Past performance is not indicative of future results, and unrealized performance is not yet performance at all.
Valuation policy
How a manager marks illiquid assets is a governance question before it is an accounting one. Advisors should establish who performs valuations, how often, which methodology they use, and with what independence. Independent valuation of input, consistent methodology across periods, and board oversight are the healthy patterns. A self-marked NAV without independent oversight is a red flag, particularly in evergreen vehicles where investors transact at NAV every period, because entry and exit prices are only as fair as the marks behind them.
Fee and expense structure
The full cost stack includes the management fee, incentive fee or carried interest, any hurdle rate (the return the manager must clear before incentive fees apply), fund-level expenses, administration fees, and any feeder-level layer. Two questions cut through complexity. What is the total expected annual cost, in dollars, for this client's investment size? And what does the manager have to achieve before it earns its incentive? Alignment mechanisms matter as much as levels: a meaningful GP commitment, the manager's own capital in the fund, and claw back provisions, which return over-distributed carry; both tie the manager's outcome to the investors.
Alignment of strategy and behavior
Read the deals, not just the deck. A manager's actual investments should match its stated strategy in stage, sector, check size, and geography. Style drift- a lower-middle-market lender stretching into large, syndicated deals, or an early-stage specialist writing late-stage checks- tells an advisor that the strategy being sold is not the strategy being run. Fund documents should also be checked for the flexibility they grant broad mandates permit drift; tight mandates constrain it.
Operational due diligence
Operational failures, not investment losses, account for a disproportionate share of true disasters in private funds, and operational review is a separate exercise from investment review. The core checklist is knowable and objective: an independent fund administrator; audited financial statements from a reputable firm; qualified custody of assets; a compliance function with genuine independence; cybersecurity and business continuity programs; and clean regulatory and litigation histories for the firm and its principals. The ILPA and AIMA standardized due-diligence questionnaires give advisors a professional-grade starting framework,23 and the SEC's January 2022 Risk Alert on private fund advisers made clear that recommending private funds without adequate diligence is itself an examination issue.18
Reporting quality
Reporting is due diligence that continues after the wire. Strong managers deliver timely statements, portfolio-level transparency with look-through detail on underlying holdings, clear fee and expense reporting, and candid commentary in difficult periods. Weak reporting is not merely inconvenient; it removes the advisor's ability to monitor, which is part of the fiduciary duty described in Chapter 7.