Say an investment fund puts \$1 million into private equity investment in 3 installments (\$500k, \$250k, \$250k).
You're given a data table which shows the date, contributions (\$500k, \$250k, \$250k in 2016), distributions (which were in 2017), and valuations.
(1) How would one calculate the performance of this investment (GIPS standard taken into account)?
(2) And how would you value this investment for end of the year 2017?
I am not an expert on GIPS, with its many pages of rules, but I do remember that under GIPS Private Equity results are to be given in terms of IRR (Internal Rate of Return). In most other cases (stock/bond portfolios for example) GIPS requires TWR (Time Weighted Return) and forbids the use of IRR.
To compute the IRR we need the dates and amounts of cash inflows and outflows (first 3 columns in your table). In addition because this investment has not been liquidated yet we will use the last valuation (527,455 on 2017/09/30) as the Terminal Value in the calculation.
We would enter the following in an Excel spreadsheet:
03/15/2016 -500,000
07/10/2016 -250,000
10/25/2016 -250,000
02/20/2017 115,000
05/27/2017 375,000
08/10/2017 63,000
09/30/2017 527,455
Using the =XIRR(B1:B7,A1:A7) function we find:
XIRR= 7.156%
So the rate of return on this investment is 7.156% per year.
As to the second question "the valuation for the end of the year 2017", I would use 527,455, perhaps with a footnote saying this is the value on 9/30/2017, the latest value available. Of course I would use the 12/31/2017 value if it was given.
