SEC scrutiny of net IRR calculations spurs discussion

The questions were spurred by a Reuters report earlier this week that the U.S. Securities and Exchange Commission is examining how general partners calculate the performance figures they include in marketing materials when raising new funds. In particular, the SEC wants to know if GPs include their GP commitments when calculating net IRR, according to Reuters. The regulator also wants to know if GPs disclose to LPs that GP commitments are factored into net IRR, since that could inflate the fund’s average net performance figure, Reuters reported.

Apollo Global Management is transparent in disclosures to its investors, Martin Kelly, the firm’s chief financial officer, said during the firm’s third-quarter earnings call. Apollo is unaware of aware of any investigations around IRRs, he said.

Kelly added that including the GP commitment doesn’t have a big impact when calculating performance. “If you take Fund VII, in our case, the net IRR … to date would be approximately 20 basis points different,” Kelly said, according to a transcript of the call.

A recent Apollo quarterly filing defines net IRR as ”the gross IRR applicable to all investors, including related parties which may not pay fees,” which encompasses the GP commitment, said a source with knowledge of the filing.

Reuters reported that The Carlyle Group does not include GP commitments in its net IRR calculation. The firm briefly addressed the issue on its earnings call Wednesday. “Although the story is news to me, it is not all that surprising,” Carlyle co-CEO Bill Conway said. 

A Carlyle filing from August defines net IRR as “the annualized IRR for the period indicated on limited partner invested capital based on contributions, distributions and unrealized value after management fees, expenses and carried interest.”