Introduction
An institutional investor committing to a new private equity fund is buying a portfolio that does not exist yet. The only evidence on offer is what the same people did before, so limited partner (LP) due diligence tests whether that evidence still applies: whether the team behind the old returns will invest the new fund, whether each deal is credited to the right people, how much of the record is cash rather than marks, and what investors kept after fees and carry. The standard questionnaire of the Institutional Limited Partners Association (ILPA) even asks for the cash flows of deals a lead partner completed before joining the firm.
A placement agent prepares the manager for that test before launch, within the sequence described in the fundraising process from pre-marketing to final close. The result is a document set and a track-record package that must survive LPs rebuilding every number from cash flows.
The Document Set: PPM, LPA, Data Room, and DDQ
Each document answers a different question. The fund presentation, or pitch book, is the marketing piece: thesis, team, headline record. The private placement memorandum is the legal disclosure document, drafted by fund counsel and written to protect as much as to persuade.
- Private Placement Memorandum (PPM)
The offering document for a privately placed fund. It describes the strategy, team and track record, sets out risk factors and conflicts of interest, and summarizes the principal terms and tax and regulatory matters; the limited partnership agreement governs where the two differ.
The PPM earns its keep in the risk factors and conflict disclosures: Securities and Exchange Commission (SEC) Rule 206(4)-8 bars an adviser to a private fund from misleading any investor or prospective investor about a material fact. Its summary of terms previews the draft limited partnership agreement (LPA) that LPs negotiate, as covered in negotiating fund terms, side letters, and first-close incentives. The agent has its own duty: the Financial Industry Regulatory Authority (FINRA) warned broker-dealers in Regulatory Notice 10-22 that they must reasonably investigate private placements they recommend rather than rely blindly on the issuer.
What the Data Room Holds
The virtual data room holds the evidence behind the PPM:
| Folder | Typical contents | What LPs use it for |
|---|---|---|
| Offering documents | PPM, presentation, draft LPA, subscription documents | Terms and disclosures |
| Track record | Fund and deal cash flows, valuation history | Rebuilding returns |
| Team | Biographies, departures, carry allocation | Continuity and alignment |
| Operations | Valuation policy, audited accounts, compliance manual | Operational diligence |
Answers are organized around ILPA's DDQ 2.0, last updated in November 2021, whose 20 topics run from succession planning to track record and valuation; the analyst's share of that work appears in the private capital advisory workstream map. Its appendix doubles as a track-record template: ILPA's DDQ asks for fund returns gross and net, with and without credit facilities, and a schedule of every deal naming who led, sourced, and diligenced it.
Team Continuity: Is the Team That Earned the Record Still Here?
An LP backs people for a decade, so the first question is team stability. The ILPA questionnaire asks for senior departures over the last two funds, the deals each leaver led and why they left, plus the firm's succession plan. Contractual protection comes from the key person provision, covered in the limited partnership agreement article; diligence looks behind the clause:
- Departures and their deals: whether leavers led the fund's best or worst investments.
- Carry allocation: how much the founders keep, how widely it is shared, and what happens to a leaver's unvested carry.
- Succession depth: whether younger partners have led deals or only supported them.
Departures matter most when tied to specific deals, which is where attribution begins.
Track-Record Attribution: Who Actually Did Each Deal
Returns belong to the firm, but LPs underwrite people. Fund-level returns blend every partner's decisions; deal-level data shows who led each investment and lets an LP recompute the record without anyone who has left.
Reading a Deal-by-Deal Schedule
Take an illustrative Fund III, figures in millions of dollars:
| Company | Lead partner | Status | Invested | Value | Gross multiple |
|---|---|---|---|---|---|
| A | X (departed) | Realized | 60 | 210 | 3.50x |
| B | Y | Realized | 70 | 175 | 2.50x |
| C | Z | Realized | 50 | 60 | 1.20x |
| D | Y | Unrealized | 80 | 176 | 2.20x |
| E | Z | Unrealized | 60 | 105 | 1.75x |
| F | Y | Unrealized | 40 | 66 | 1.65x |
The headline is a 2.2x gross multiple on 360 invested. Remove Company A, led by a partner who has left, and the remaining team's record is about 1.94x; its realized deals alone, about 1.96x. Neither figure rules the manager out, but the agent should show both before LPs compute them, with evidence of who else worked on Company A.
Spin-Outs and Portable Track Records
Attribution becomes a legal question when a team leaves to found its own firm. For SEC-registered advisers, the marketing rule, Rule 206(4)-1, calls a record earned elsewhere predecessor performance.
- Predecessor Performance
Investment results advertised by an adviser that did not manage the investments throughout the period shown, typically a team's record at a former firm. The SEC marketing rule permits it only if the people primarily responsible manage accounts at the new adviser, the accounts are sufficiently similar, substantially similar accounts are not cherry-picked, and the source is clearly disclosed.
The SEC's adopting release adds that where a committee decided, a committee with a substantial identity of members must manage the new accounts, and the adviser needs access to the books and records behind the numbers. A spin-out needs its old firm's cash-flow records, not only its memory; its other hurdles are covered in first-time funds and emerging managers.
Explaining Returns With a Value Creation Bridge
Names say who did a deal; a value creation bridge says how. It splits each equity gain into earnings growth, multiple expansion, and debt paydown, as this walkthrough of how private equity makes money shows. Company B's gain of 105 might split into 60 from EBITDA growth, 25 from a higher exit multiple, and 20 from debt reduction. Earnings growth is the part a manager can claim to repeat; the multiple owed much to timing.
Realized Versus Unrealized: Testing the Marks
LPs split every record into realized value, cash returned, and unrealized value, the manager's current marks, the distinction set out in reading a fund track record. In Fund III the realized half earned about 2.47x and the unrealized half is marked at about 1.93x, so marks carry about 44% of the headline value.
LPs discount open marks by holding age, by concentration in a few assets, and by the method behind each mark, which how a fund's net asset value is set explains. The sharpest test compares marks with exit prices: the ILPA template asks, for each realized deal, for the enterprise value in the last interim valuation before the sale was signed. Exits above prior marks lend credibility to the marks still open.
The scepticism has evidence behind it. Using Burgiss data, Gregory Brown, Oleg Gredil, and Steven Kaplan found that some underperforming managers boost reported returns while fundraising, though they rarely raise a next fund, and that top performers probably understate valuations.
Reconciling Gross and Net Returns
Deal schedules are gross, before the fund's costs. LPs are paid net, after management fees, expenses, and carried interest, whose mechanics are covered in the article on management fees and the distribution waterfall. The agent owes LPs a bridge they can follow line by line.
A Small Gross-to-Net Bridge
In Fund III, LPs paid in 400: 360 into companies and 40 for fees and expenses. Assume a whole-of-fund waterfall with 20% carry, past its hurdle and catch-up:
| Step | Value to LPs | Base | Multiple |
|---|---|---|---|
| Gross, on invested capital | 792 | 360 | 2.20x |
| Add fees and expenses to the base | 792 | 400 | 1.98x |
| Deduct 20% carry on the 392 profit | 713.6 | 400 | 1.78x |
About half the 0.42x gap is fees and half is carried interest. In internal rate of return (IRR) terms the gap is widest early, when fees are paid and little is realized.
What the Rules Require and Why Gaps Differ
The SEC marketing rule bars showing gross performance unless net performance appears with at least equal prominence, over the same period and methodology; its one-, five- and ten-year periods do not apply to private funds. A single deal's return is extracted performance, which a March 2025 staff FAQ allows gross only if labelled gross and shown beside the whole fund's gross and net returns for the full period. The same marketing compliance FAQ said in February 2024 that a gross IRR excluding a subscription facility cannot be paired only with a net IRR including it.
Two funds with the same gross record can show different net returns:
- Performance level: carry scales with profit, so a 1.3x fund's gap is mostly fees.
- Fee basis and pace: a fee on commitments costs more when deployment is slow.
- Carry timing: deal-by-deal carry is paid earlier than whole-of-fund carry, lowering net IRR.
- Offsets and credit lines: portfolio-company fees credited to LPs narrow the gap.
Every weakness here, a departed partner's best deal, an old mark, a wide gross-to-net gap, eventually reaches LPs, because the questionnaire asks for it. What the agent controls is the sequence of disclosure: who raises each point first. A departure explained on the team page is a fact to weigh; the same departure found in the cash-flow file looks concealed, and the LP starts discounting everything else. Good preparation changes less about the numbers than the order in which LPs meet them.
