Calculating and Reporting Private Fund Performance

New SEC FAQ puts misaligned inputs in the spotlight

Kim Cash, Founder of Cascade Compliance and Janice Kitzman, Partner, Cascade Compliance
Originally published on 23 April 2024

As the private funds industry continues to wrestle with a raft of evolving disclosure and reporting requirements, new guidance from the Securities and Exchanges Commission (SEC) published in response to frequently asked questions (FAQs) from market participants caught many by surprise.

Among the SEC’s stated goals in publishing its February FAQ is to increase the accuracy and consistency of the timing inputs funds use for calculating and presenting their internal rates of return (IRRs). At issue is a misalignment of timing inputs many private funds continue to use in their performance calculation methodologies, which can result in inaccurate representations of gross versus net returns.

Legal and compliance professionals acknowledge that timing inputs for performance calculations used throughout the private funds space varies significantly across advisors, funds and firms. Indeed, in the two years since the SEC adopted major changes to the Marketing Rule of the Investment Advisers Act of 1940, the vast majority of private market participants continue to lack clear and consistent methodologies for complying with the performance reporting requirements, now underscored by the SEC. As fiduciaries, registered private fund advisors are required to accurately represent performance based on consistent reporting timeframes under the amended Marketing Rule of the 40 Act.

A misalignment of timing inputs... can result in inaccurate representations of gross versus net returns.

Kim Cash and Janice Kitzman, Cascade Compliance


Many fund IRR calculations are maintained in Excel, so the start date for performance is typically the first date referenced in a stream of valuations. Based on calculations provided courtesy of CFA Institute’s Global Investment Performance Standards (GIPS® standards) online resources, Table 1 shows the impact of presenting net performance with and without subscription lines of credit included, a difference of 21.47% versus 13.28%, respectively, for the same fund through the same year-end date. The most important variable in the differences in returns is the inception date of fund performance given the subscription line of credit.

Table 1 Sample impact of different start dates on performance. Source: CFA Institute

For any firm that doesn’t utilize fund-level subscription lines of credit, the start date will likely be the same for both gross and net performance, and typically either the date capital is first called or the date the first investment is made. Firms claiming compliance with the GIPS® standards that utilize subscription lines of credit for periods of 120 days or longer are already required to show performance with and without the impact of the subscription line of credit. Net performance with and without the impact of the line of credit is also required if principal is used for a distribution.

However, even if a firm utilizes subscription lines of credit for shorter periods, the SEC’s new Q&A underscores the regulators’ position that only showing returns that include the impact of the subscription line of credit has the potential to be misleading. Comparable returns (both with and without) is best practice even for shorter periods of time.


For any firm showing net returns with subscription lines of credit that doesn’t include comparable net returns without the impact of the line of credit, the SEC FAQ does note that the general prohibitions may be met with “appropriate disclosures describing the impact of such subscription facilities on the net performance shown”. Based on the new FAQ and the amended PF Rule, however, large differences in returns cannot be disclosed away, and private funds should show returns that reflect gross and net performance both with and without the subscription lines of credit.

The GIPS Standards require performance periods presented to be clearly labeled and include disclosure of the inception date of the fund. Additionally, if subscription lines of credit are used for 120 days or more (or if principal is used to fund distribution), firms must show both types of net returns and must disclose if composite returns do or do not reflect the subscription line of credit; the size and purpose for using the subscription line of credit; and the amount outstanding as of the most recent annual period end.

The SEC marketing rule has no “within 120 days” exception and also requires firms to disclose how returns are calculated. Firms utilizing lines of credit should include both inception date and descriptions of lines of credit in any marketing materials that include performance.

Transparency in investment performance reporting has always been good form, but given regulators’ intensified effort to leave no more room for misinterpretation, funds are well-advised to work with an independent compliance specialist to check the performance calculation input for the start date of their IRR and ensure the same date is used for both gross and net performance. Additionally, they should ensure that their disclosures adequately describe the methodology used.


Callout from

Q: Must gross and net performance shown in an advertisement always be calculated using the same methodology and over the same time period?

A: Yes. Although the marketing rule does not prescribe any particular methodology or calculation for performance, the rule requires that any presentation of gross performance be accompanied by a presentation of net performance that has been calculated over the same time period and using the same type of return and methodology as the gross performance.1 In addition, net performance must be presented in a format designed to facilitate comparison with gross performance.2

The staff understands that certain advisers to private funds may wish to present gross internal rate of return (“Gross IRR”) that is calculated from the time an investment is made (without reflecting fund borrowing or “subscription facilities”)3 and then present net internal rate of return (“Net IRR”) that is calculated from the time investor capital has been called to repay such borrowing.4 In the staff’s view, if an adviser chooses to exclude the impact of such subscription facilities from the fund’s Gross IRR, it cannot then include them in the Net IRR that is presented to comply with section (d)(1) of the marketing rule. In other words, when an adviser advertises its private fund’s performance in terms of Gross IRR and Net IRR, presenting Gross IRR that is calculated without the impact of fund-level subscription facilities compared only to Net IRR that is calculated with the impact of fund-level subscription facilities would violate the marketing rule. The staff believes that such a presentation would result in IRR calculations being made across different time periods (e.g., Gross IRR calculations beginning when funds initially use their lines of credit to acquire investments, and Net IRR calculations beginning only once all capital commitments are called and the lines of credit are retired).

This practice would also result in the use of different methodologies being used for the Gross and Net IRRs (i.e., calculating performance without and with the impact of fund-level subscription facilities). Such a presentation would also violate the provision requiring presentations of performance in a format designed to facilitate comparison between net and gross performance.5 Accordingly, in the staff’s view, if an adviser were to include in an advertisement the Gross IRR of a private fund calculated from before capital commitments are called, then it would need also to show the Net IRR calculated from the same time before capital commitments are called (i.e., including the effect of fund-level subscription facilities in its calculation).

Further, in the staff’s view, an adviser would violate the general prohibitions (e.g., Rule 206(4)-1(a)(1) and Rule 206(4)-1(a)(6)) if it showed only Net IRR that includes the impact of fund-level subscription facilities without including either (i) comparable performance (e.g., Net IRR without the impact of fund-level subscription facilities) or (ii) appropriate disclosures describing the impact of such subscription facilities on the net performance shown. The staff believes that presenting only Net IRR that includes the impact of fund-level subscription facilities could mislead investors by suggesting that the fund’s advertised performance is similar to the performance that the investor has achieved from its investment in the fund alone.

  1. Rule 206(4)-1(d)(1) prohibits an investment adviser from, directly or indirectly, disseminating any advertisement that includes “any presentation of gross performance, unless the advertisement also presents net performance: (i) with at least equal prominence to, and in a format designed to facilitate comparison with, the gross performance; and (ii) calculated over the same time period, and using the same type of return and methodology, as the gross performance.”
  2. Id.
  3. Fund-level subscription facilities include, for example, any subscription facilities, subscription line financing, capital call facilities, capital commitment facilities, bridge lines, or other indebtedness incurred by a private fund, or on its behalf, that is secured by the unfunded capital commitments of the private fund’s investors.
  4. A private fund’s internal rate of return can be described, for example, as the discount rate that causes the net present value of all cash flows throughout the life of the private fund to be equal to zero.
  5. Id.

About the Authors

Kim Cash

Founder, Cascade Compliance
Founder of Cascade Investment Compliance & Verification, Kim Cash (CFA, CAIA, CIPM, CSCP) brings nearly 30 years of investment industry compliance and performance verification experience to each client engagement. Kim will be sharing practitioner insights related to the SEC FAQ and PFAR as a featured speaker at the annual member meeting of The Exchange Network in Chicago on April 29.  

Janice Kitzman
Partner, Cascade Compliance
Partner at Cascade Compliance and Chair of the GIPS standards Verification Subcommittee, Janice Kitzman, CIPM, has 14 years of experience working as a hands-on verification lead for clients from small start-up firms to complex global asset managers and everything in between.