In the first part of this series, we explored the wide variety of benchmarks that can be generated with Preqin’s performance data. In the second part, we examined the tools that enable you to compare benchmarks across different asset classes, or between public and private markets. In this third and final instalment, we explain how Preqin can help you determine the specific cash flow you might expect from a fund.
When an IRR Errs
It is a common criticism of most private capital performance metrics that they are usually a projection, rather than an accurate reflection of current returns. This issue has been highlighted in recent years: as the low interest rate environment has made it easier for fund managers to obtain credit and leverage, an increasing proportion have used credit lines, thus limiting the amount of capital they call early on.
Most investors approve of the use of credit lines as a means of making capital calls more predictable and regular. But some are concerned that their use can ultimately manipulate a fund’s IRR to make it look more favourable – theoretically, using a credit line to quickly flip a portfolio company could push a fund’s IRR towards infinity. Given that most fund managers re-enter the fundraising market while their previous fund is still making investments, this is a particular concern for investors.
For this reason, we are focusing on providing an ever-expanding database of funds which contains not just performance information, but the precise timings and details of capital calls and distributions. Our database currently holds such details for more than 4,000 private capital funds, and we aim to double this within the next 12 months.
As discussed in our series on fund selection, Preqin’s database of fund terms information allows you to see the charges and terms that a fund uses, and can calculate averages for specific fund types, locations and sizes. Beyond the headline fees, we track details on terms like hurdle rates, redemption notices, fee reduction mechanisms and so on. We are also working to add details of funds using credit lines so you can see how they are used across asset classes.
While this enables you to discover the costs expected for a given fund, our Cash Flow tool allows you to model the exact timing and size of capital flows for a specific fund or collection of funds. This bypasses the projection element of a traditional IRR benchmark, and is therefore not affected by early distributions or the use of credit lines.
Overall, this means you can project what a fund will cost, what it will return and when. This means you can benchmark funds against one another with absolute precision: rather than comparing projections, you can look at the real flow of capital and account for the time value of money.
Ultimately, Preqin understands that no single measure of performance is suitable for any instance, especially for alternative assets funds. Benchmarking a prospective fund by looking at the previous performance of similar funds is a very different exercise from comparing the funds in your portfolio to each other, or displaying the outperformance of your fund against your peers or public markets.
This is why we aim to provide as many different benchmarking methods as you need for a truly 360-degree view of performance and its context. From top-level tracking of whole asset classes and indices to the absolute granularity of tracking individual capital calls and distributions, our benchmarks can suit any purpose.
If you are interested in finding out more about how we can help you with benchmarking, please click here to request a demo. You can also read part one or part two of this series, or take a look at our previous series on fund selection and fundraising.