Accurately recording distributions to investors for XIRR purposes?
Curious how you all are running distributions through your waterfalls
We distribute 30 days after quarter end for the quarter, but have been running a monthly distribution schedule to align with the model itself which then overstates the xirr formula for when investors actually receive cash. However, if you align it with the day checks are sent out to LPs, its a huge drag on promote because its based off IRR.
What's best practice here? Guessing its dependent on legal documentation but interested to see how others approach it
Not sure I understand the question. But if you’re distributing funds quarterly, you shouldn’t show monthly IRR to investors. That’s ludicrous. You should show them the quarterly IRR so you don’t overstate the return and / or dilute your promote.
Agreed here. I’ve always seen return waterfalls documented as the day cash comes in and is sent out (usually there is an “effective date” when ACH/Wires are sent out if it arrives differently). The consequence being that there is always some amount of cash drag. I.e. your Q4 cash distribution isn’t going to show up in your Q4 performance, it will show up as cash in your Q4 NAV and you will see the actual distribution in your Q1 performance.
I agree but for the waterfall, should you be accruing interest for the days in between when the quarter ends to when checks are actually sent out? Like for example if quarter ends 9/30, but checks don't get sent til 10/31, I would need to accrue through 10/31 or the ending balance would be misstated, no?
Correct, if you are still in a pref or an IRR hurdle then you need to accrue through the effective date. In practice it’s never perfect and usually there are true-ups here or there.
Got it - thanks for the help
Sorry to keep asking a ton of questions, but would you layer in AM / Acq fees prior to REPE GP / LP waterfall, once the project waterfall is finished, or would you add those below the total investor member cash flows and run a claw back if it dips below the preferred return? Everyone I've talked to here seems to think about it differently so I'm trying to get outside advice
Yup. This 100%. Unless your docs say differently, all your reporting should be done on the specified agreed timeframe in your executed docs.
This goes for any operating CF too. If your docs say quarterly reporting then you should give them quarterly projections. Providing monthly is only going to raise unnecessary questions.
Anyone have good software recommendation for trust accounting and for calculating stuff like the above?
My previous role I was in charge of this (with no prior experience) and had to quit becuase I had no idea what I was doing and no accounting experience. I was keeping trust account in excel lol. Most stressful time of my life
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