Performance Perspectives Blog

If it looks, walks, and sounds like a duck …

by | Oct 26, 2009

Several years ago I pleaded with the then, “powers that be,” to loosen the rules regarding the use of IRR for GIPS(R) compliant firms. At that time, the ONLY asset class for which the rules applied was private equity.

The soon-to-be-published GIPS 2010 edition (which goes into effect 1 January 2011) will most likely expand this to include real estate partnerships. Hurrah!!!!

But why stop there???

The rule should be quite simple: if the MANAGER controls the cash flows, then IRR applies. How hard is that?

The basis for my initial pursuit was because we had a client who invested in public equity, but established partnerships EXACTLY the same way as a private equity manager, and controlled the cash flows. I made (what I thought was) an excellent defense for the position to expand the rules, but I failed 🙁

We have a new client that invests in illiquid assets that are not private equities. Again, they establish partnerships. Again, they control the flows. But, the rules, as written, say to use time-weighting. WHY???? If the GIPS Executive Committee were the SEC, I’d ask for a “no-action letter,” to permit the client to use IRR. But, they’re not. And so, what do we do?

I recently asked that the rules be expanded again. And, I believe the EC considered this. And, I am confident that at least one of the members agrees with me. But, so far no movement. Hopefully we will see this change in the future.

Note: you will no doubt hear from some folks who say that the IRR isn’t used because the manager controls the flows but because the asset is illiquid. I can provide MANY references supporting my position. I hope that we will succeed in the near future as this makes perfect sense.

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