Fund managers that use monthly cash flow figures when communicating their track record data to investors could be misstating their returns by up to 10 percent, according to analysis from software provider TopQ Software.
This is because fund managers often consolidate a fund’s cash flow data into monthly – rather than daily – figures because spreadsheets with years of daily cash flow records quickly become unmanageable, according to TopQ.
Monthly cash flow reports introduce a margin of inaccuracy that has a potential knock-on effect on IRR calculations. Because IRR is calculated using a combination of the length of time that cash was invested in a deal and the absolute money returned by the deal using monthly figures can distort exactly how long cash was invested in a portfolio company, according to TopQ analysis.
TopQ, the brainchild of SL Capital founding partners Graeme Faulds and Graham Paterson and Drake Paulson formerly of fund administrators Vitech Systems Group, is a newly-launched cloud-based software provider that aims to securely and accurately host a firm’s performance data.
“It was always unbelievable to us that we were working in a $3 trillion industry still predominantly run on spreadsheets,” Faulds said in a statement. “This has always made track record analysis a painstaking and long-winded process for both fund managers and investors.”
TopQ aims to eliminate the risk of spreadsheet inaccuracies by allowing fund managers to upload their fund performance data and cash flows securely and quickly to an online portal. This is also a benefit to LPs, said Paterson.
“Even the worst performers can manage to dig up one particular metric which puts their fund in the top quartile, which means as an investor you end up having to cut through a lot of layers of data before you can perform an apples-to-apples comparison. One of the driving forces behind the establishment of TopQ was the need to give investors peace of mind when conducting their due diligence.”