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Loud and Clear – September 2020

Track record attribution (part 4): construction hints and tips

 

This final article in our four-part series (part 1, part 2, part 3) outlines a number of considerations for new managers to keep in mind when (re)constructing a track record. It is of most relevance for a newly-formed manager with an existing track record but without agreed attribution – and hence access to the necessary cash flow data – from prior employer(s).

1. Format. You are aiming to provide prospective investors with an Excel-based track record model. Ideally the track record and the performance numbers therein (gross multiple and IRR) should be calculated from actual cash flows, rather than being hard coded. A PDF summary of the track record may suffice in extremis (or for new managers that are heavily in demand), but in most instances will be far from satisfactory.

2. Sources. There are a number of possible sources to go to in order to construct cash flows when you do not have agreed attribution from a prior employer.

a) Public data sources such as Companies House in the UK can help. If you are a UK-focused fund, be prepared to get very familiar with Companies House.

b) CFOs at former portfolio companies can be a key source for data and verification of same. They may be able to provide external confirmation of cash flows and other pertinent data (entry EVs, EBITDA, multiples etc.) for their company.

c) A friendly CFO at your previous employer may also oblige. This is perhaps unlikely in a situation where attribution letters are not forthcoming and certainly a no-go if you left you prior firm on fractious terms. But otherwise there is no harm in asking. Email confirmation that a particular cash flow is accurate, for example, will be very helpful for the track record attribution file.

d) Quarterly or annual reports from your prior employer(s) will be an ideal source of data and – depending on whether you were deemed a good or bad leaver and your entitlement to future carry – you may have access to them. But you will not be able to rely on them alone, unless you are absolutely sure you are on legally safe ground to do so. Nonetheless, they can give you confidence you are on the right track, if the cash flows in your track record are resulting in performance metrics that match those shown in the reporting of your prior employer(s).

3. Build a verification file. Be sure to keep records in order to build a track record and cash flow verification file. In an ideal world, you are aiming to have back-up and verification for every cash flow in your track record. You may think the likelihood of a prospective LP asking to see the file is low, but you’ll be glad you have it when the $50 million anchor investor makes the request …

4. Be able to explain discrepancies. Any discrepancies between the numbers you are marketing with and those shown in the reporting of prior employer(s) will need understanding and explaining. Remember that some of the prospective investors you are speaking to may be LPs in one or more of the funds managed by the manager(s) you are spinning out from. They will therefore have the data. Investors will likely forgive small discrepancies, especially if they understand you are re-creating the track record from scratch. But an entire turn or two on the gross multiple will be less easy to pass off.

5. And finally …. Have a good CFO! Believe us, having a talented, hardworking and experienced CFO or FD spearheading the process will be worth his or her weight in gold.


And if you have more questions, please contact Matthew Craig-Greene, using the details below.

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