SEC Probing Private Equity Performance Figures, Sources Say

Complex Calculation

The average net IRR figure is crucial to investors' understanding of their actual profits from private equity funds. That's because not all investors in a fund pay the same amount of fees to the private equity firm for managing their money.

Typically, fund managers charge a management fee of about 1.5 percent of committed capital and take 20 percent of the fund's profits assuming performance meets a returns hurdle agreed with investors.

Investors, however, are usually offered fee breaks if, for example, they commit money early during the fundraising process or if they make a larger allocation to the fund.

The SEC expects private equity firms to report average net IRRs alongside gross IRRs with equal prominence in marketing materials when they are seeking to raise a new fund.

Industry sources said including general partner capital in the average net IRR calculation can make a material difference if that commitment is sizeable.

"Over the past five years, some general partners have started to invest more of their personal capital into their vehicles on a non-fee basis and that obviously can create some IRR distortion," said David Fann, chief executive officer of TorreyCove Capital Partners LLC, a private equity advisory firm.