When fundraising the US Securities and Exchange Commission (SEC) says you can only highlight certain performance numbers if the same team or dealmakers responsible for that success will be working on the next fund. There’s a lot of gray area for GPs here, so how exactly can you go about attributing success to individual partners or teams?
April Evans’ answer:
I certainly understand what the SEC is trying to accomplish by limiting a firm’s description of its track record to represent only deals done by the team that will manage the next fund. The goal is to ensure that an investor can make an investment decision on the people who will actually manage their money – and not on folks who are no longer present, who will have no impact on returns in a new fund.
The question of how one attributes portfolio performance to individual partners, though, goes well beyond just separating out folks who have left the firm. In many firms, there is but one partner per deal. As long as the partner on the deal is the partner who brought the deal into the firm, then attribution is quite easy. And, if the firm places no particular value on sourcing when analyzing results, even if the sourcing partner is not the deal partner, attribution is straightforward.
By contrast, in an environment that operates on a team-based approach, attributing portfolio performance to individuals is very difficult. Let me provide some color on the complexities we at Monitor Clipper face attempting to attribute performance to individuals. First, the person who sources a deal may not actually staff a deal. For each investment we make, we put together the team best able to (1) understand the investment and its industry, and (2) add the greatest value. Adding value could mean working to restructure logistics. It could mean building out an executive management team. Or, it could mean developing the sales and marketing functions. And, then there’s professionalizing the company’s infrastructure – from IT to finance and accounting. Each of these challenges requires a different skill set. So, we populate the team for each investment based on who can best address the company’s specific challenges. The logical extension of this approach is that a deal team may change over the life of an investment as different kinds of expertise are brought to bear at different times.
So, given all of this, how do we attribute results to individuals? The short answer is that we do not, as we do not believe it can be done effectively in a team-based investing environment. Rather, we provide our investors information about all of the members of the deal team working on any given investment. We leave it to them to decide how to attribute results to individuals, in the event that doing so is important to them. f an investor is interested in isolating an individual’s contribution to create an individual track record, then I presume that the investor will identify each company on which the person works or worked, and then find a way to rank that person’s role compared to others within the deal team for each investment. More weight would be given to investments where the individual plays a larger role, and less weight to lesser contributions. We think this is a difficult analysis to do in a firm such as ours – with modest predictive value. In this environment where individual attribution is, at best, complicated, I would hope that investors understand that the track record that matters is the firm’s performance in its most recent fund, as the most recent fund’s construction will most closely represent the construction of the next fund as long as the team of the most recent fund is largely the team for the new fund.
April Evans is chief financial officer and chief operating officer of Monitor Clipper Partners, a mid-market private equity firm.