On February 6, the SEC Staff updated the Marketing Compliance FAQs related to the presentation of Gross and Net IRR performance. All private fund advisers should take note of the significant new guidance and immediately assess what changes are needed to current marketing materials.
The new frequently asked question seeks to clarify the way the SEC Staff believes advisers should present gross and net performance for private funds saying “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 SEC believes the method of performance presentation above results in IRR calculations being made across different time periods and uses different methodologies and is therefore not a direct comparison of performance and violation of the Marketing Rule.
While the FAQs language can be a bit verbose, the end result appears to be, as a baseline, the SEC believes advisers should show unlevered net IRR in order to be fair, clear and not misleading. If unlevered net IRR is shown, gross IRR calculated using the same dates of the cash flows can accompany it. Unlevered net IRR must also be shown if an adviser plans to show levered net IRR. Of course, comprehensive disclosure should accompany any presentation of performance, especially given the nuances involved with the removal of fund-level subscription facilities.
How Trillium Can Help
Marketing Material Review and Process: Marketing material review and commentary is included as part of Trillium’s comprehensive ongoing compliance support. Trillium also helps clients design and implement marketing material review processes through the use of technology to ensure proper records are created and maintained.
Regulatory Tracking: Trillium keeps track of changes in the regulation of private equity funds and informs clients through email, phone calls and in-person discussions. We quickly identify and analyze impactful regulations and diligently work with our clients to make the necessary amendments to policies and procedures to ensure ongoing compliance.The entire FAQ can be found on the SEC’s website.