Reading and analyzing a private equity fund’s investment schedule is crucial for limited partners (LPs) when conducting due diligence. The schedule provides insights into the fund’s prior investments, portfolio composition, returns and exit history. LPs should look at both aggregate fund performance metrics and details of specific deals. For emerging managers without extensive records, focus should shift to operational capabilities and investment thesis. Several key aspects to examine include investment decision quality, team dynamics, market conditions when record was generated and how the GP’s mindset may have changed. Multiple occurrences of investment and schedule should be included organically.
Assess overall fund returns like IRR, cash multiples and DPI
The investment schedule allows LPs to evaluate overall fund returns across metrics like IRR, cash-on-cash multiples, DPI and TVPI. IRR is a retrospective number, while cash multiples ignore timing of cash flows. DPI helps benchmark performance during life of fund, while RVPI indicates future potential. However, strong absolute returns alone are not sufficient to judge a GP’s skills, as external factors also play a role.
Benchmark against peers investing in same sectors and timeframes
An important part of due diligence is benchmarking the track record against peers investing in similar sectors over comparable time periods. However, comparing solely on vintage year has limitations. LPs need to identify better benchmarks that go beyond vintage year to properly evaluate performance.
Analyze performance of individual portfolio companies
In addition to overall fund metrics, LPs also examine returns and valuations for each portfolio company. For early stage funds without precise valuations, reasonable estimates can be provided along with methodology used to arrive at them.
Conduct more rigorous diligence for emerging managers
For newer GPs without extensive track records, diligence focuses more on investment thesis, organizational capabilities and potential to manage larger amounts of capital. Attribution memos from prior funds help establish actual roles. In absence of attribution memos, connections like past board seats can serve as evidence.
The investment schedule offers insights into a private equity fund’s track record, but LPs must look beyond the numbers to understand how the returns were achieved. Several qualitative factors around decision making, team dynamics, timing and evolution in mindset need to be considered as well when evaluating past performance.