Why do LPs trust but still check GPs’ performance data?

Nearly eight in 10 limited partners and consultants recalculate fund managers’ track records during due diligence, according to a new survey.

A large majority of limited partners trust performance numbers provided by fund managers during due diligence, but only a minority of them never recalculate them, according to a study.

In a survey titled “2017 Private Markets Investor & Consultant Due Diligence” conducted by cloud-based private funds marketplace eVestment, 78 percent of respondents said they always or often trust the performance data they receive during due diligence, while 76 percent always or often recalculate it.

For those who rarely or never recalculate performance data, “it wasn’t necessarily due to a lack of appreciation of the importance of this work”, eVestment wrote in its study, but it had more to do with being resource constraints.

eVestment surveyed 60 limited partners, including pension plans, endowments and fund of funds, as well as consultants, predominantly in the Americas in late 2016.

The survey also found that funds of funds were the ones the most susceptible to double-check performance data during due diligence. More than eight in 10 funds of funds said they always or often recalculate, with 73 percent of funds of funds saying they always recalculate manager-provided performance numbers, and 9 percent saying they often do so.

By comparison, 33 percent of pensions and endowments and 38 percent of consultants said they always run the numbers themselves, while 44 percent of pensions and endowments and 25 percent of consultants often recalculate.

“I think the level of trust [in fund managers] will continue to increase as managers share more information [with their LPs],” eVestment director of private equity solutions Graeme Faulds told Private Equity International. “But investors will continue to trust but verify in their due diligence processes, as well.”

The reasons for double-checking the performance data are varied.

The respondents who recalculate data believed that high-level performance numbers provided by fund managers is not necessarily a true representation of overall manager value, eVestment said in the survey.

“We recalculate as often as we can, and have found numbers almost always materially identical,” a North American state pension fund with over $2 billion in assets said in the survey. “However, managers will certainly cherry-pick elements of their track record. So the issue isn’t inaccuracy or misrepresentation as it is selective representation. Getting the entire attributable track record is key.”

Another survey participant, a $1.5 billion North American state pension fund, referred to the rising popularity of credit line usage by fund managers to artificially boost a fund’s performance.

“By recalculating you can determine the impact that bridge loans or credit facilities can have on the numbers,” the pension said.

Survey respondents  represented $316 billion of private market assets under management.