Fund returns modelling: build trust, make better decisions

What’s the big deal?

The investment world is rife with challenges; investors are searching for yields in a market where high return opportunities often come in the form of complex investment structures that can be difficult for even the most educated investors to dissect. As a result, it can be a challenge for private equity and asset management firms to clearly articulate performance to both current and prospective investors and provide robust and transparent updates to further build trust and confidence.

In addition, private equity and asset management firms must have a clear understanding of the historical and forecast performance of the funds over time to understand the impact of their decisions on overall investor returns and management compensation. This can become particularly complicated when dealing with complex provisions in the Limited Partnership Agreement (“LPA”) around areas, such as capital recycling and carried interest calculations.

We have seen that many managers lack the appropriate tools to effectively monitor and track fund performance, which has led to suboptimal decisions and potentially embarrassing errors and/or omissions.

How effective is your returns model?

There are a number of factors to consider when evaluating your returns model and if it’s designed to meet the needs of the fund and your investors. A good returns model should not only be transparent and save you time, but also possess the following attributes and capabilities:

  1. Contain all the relevant returns metrics and key performance indicators for your various investor classes.
  2. Provide a clear view of forecast cash flows for the fund, including investing requirements, capital calls, “dry powder” available, carried interest and investor distributions.
  3. Differentiate realized vs unrealized historic returns.
  4. Align with historical data from your systems, to allow for a meaningful comparison of actual versus forecast results and to provide robust returns calculations over the life of the fund.
  5. Provide a carried interest view aligned with the terms stipulated in the LPA (e.g. “American” versus “European” structure, clawbacks, etc.).
  6. Capture the use (current and prospective) of various types of leverage and any related covenants.
  7. Use analytics to understand and clearly communicate what drives fund performance (e.g. drill downs to particular investments, regions or asset classes).
  8. Forecasts based on “value drivers” including sensitivity and scenario analysis to varying outputs in order to better understand key risks of fund performance.
  9. Be flexible. Returns models require flexibility to be replicated – if needed – across multiple funds. This helps ensure that appropriate variables can be modified for differing, more complex structures and geographic locations and regulations.
  10. Compliance with any performance standards for which you have stated compliance (e.g. Global Investment Performance Standards “GIPS”), or with regulations that the manager is subject to (e.g. NI 31-103).

A model that works for you

Your returns model is a critical strategic planning and reporting tool. It should capture the nuances of complex structures, and enable you to understand how your investment decisions and asset performance impact the overall returns provided to various classes of investors. Specifically, your model should allow you to:

  • build trust and confidence with current and prospective investors
  • better evaluate investment opportunities and the impact on overall fund performance
  • understand potential carried interest cash flows
  • clearly articulate performance to investors


Pain Point

Our client’s internal model, designed to calculate the returns (gross and net) to its feeder funds and investor classes, lacked key functionality, including the ability to recycle distributions and retain short term cash during the investment period. The model was not granular enough to account for actual timing of historical capital calls/ distributions. The client wished to have an independent party interpret the funds limited partnership agreement and create a new model with added functionality and accuracy.


Through the review of the limited partnership agreement and other financing agreements, we independently scoped and developed a new fund return model. In addition to a detailed forecast of capital calls, distributions and returns across three feeder funds and multiple investor classes, the model also tracked management fees, partnership expenses and cash flows for each of the fund’s portfolio investments. The model also included a complex revolver facility with borrowing base determined by the unfunded capital commitment of individual investor classes, a fund level debt through the securitization of individual investments and hedging instruments for foreign currency denominated investments.


We provided the client a sophisticated tool with: a fully flexible rolling forecast, performance evaluation with complete flexibility to perform a number of potential capital raising assumptions, the ability to assess the impact on investor returns of early wind ups, and forecasts of management/performance fees. The tool was transitioned to the client for their ongoing use.

Pain Point

Our client, a private equity firm with several funds, required support in the development of a tool to calculate the investor returns and carried interest for each of their funds based on their respective limited partnership agreements. As a result of varying degrees of complexity between each of the agreements, it was critical that the tool had significant flexibility so it could be utilized across the various funds. 


We reviewed each of the limited partnership agreements and confirmed a structure for the returns model with our client that would be flexible to accommodate all of the current and prospective fund structures. In doing so, we provided flexibility for factors such as multiple feeder funds, capital recycling provisions, “American” or “European” style carried interest and carried interest clawbacks. 


Upon completion of the returns model, we worked with our client to populate it for a selected fund for testing purposes. After this, we successfully transitioned the model to the client and worked with them to roll it out across their multiple funds. Having this tool saved our client significant time in the preparation of their returns calculations, while providing more robust returns numbers that were in line with the various limited partnership agreements.

Connect with PwC’s specialists in Deals Modelling and Asset and Wealth Management to explore where you may be able to improve your returns modelling. We will demonstrate our returns model tool and show you we have supported other clients with similar fund structures. A strong, robust model will give you the peace of mind and confidence to focus on what really matters to you – your investments.

Contact us

Michael Shea

Partner, Deals Modelling, PwC Canada

Tel: +1 416 687 8025

Derek Hatoum

Partner, Asset Wealth Management, Assurance, PwC Canada

Tel: +1 416 869 8755

Sean Rowe

Partner, Value Creation Leader, PwC Canada

Tel: +1 416 815 5093

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