The following considerations and methodologies are to be used when determining performance measures:
Performance measurement computation
Unitised basis versus NAV basis
In some countries, the performance of vehicles may be reported at a unit level. The guidelines have been developed on the basis that performance has been determined on aggregate NAV and cash flow basis.
The methodologies described below assume that components of measures are determined in accordance with Module 4 - INREV NAV, which is determined based on IFRS financial statements. Where this is not possible reference should be made to IFRS or local GAAP.
Dates of cash flows
Dates used for performance calculations should be based on cash flows between investors and the vehicle at the date as determined for accounting purposes. As a minimum, monthly and annual cash flows must be used however it is now common to use quarterly and daily cash flows where adoption would be encouraged, especially for open ended vehicles. For capital calls, the deadline of the capital call is to be used.
Open ended vehicles are subject to a potential constant in- and out-flow of capital. To accommodate for the large flows of capital, cash flows can be rolled up periodically, ideally on a monthly basis to the end of each month.
In the case of distributions for unitised vehicles the declared date should be used.
Closed ended vehicles should apply the dates where cash flows are called or distributed to investors. The date should reflect the effective date for capital calls where the capital should be paid in and for distributions where the capital was paid by the vehicle.
Valuation of properties
Property should be valued in accordance with guidelines defined in Module 3 – Property Valuation.
Vehicle level performance measures may be calculated on three main levels:
- net of both management and performance fees (required);
- net of management fees, but gross of performance fees (carried interest) (optional);
- gross of all management fees (optional).
Performance measures are computed net of all fees and any materialised carried interest (or any other kind of performance fee) and forecasted future (provisions for) carried interest payments. However, fees charged to investors as a result of the redemption of units or exit to/of the investors should not be considered when they are earned by the managers rather than the vehicle. Even though not required, performance measures may also be computed gross of management fees and carried interest payments.
When fees are charged to investors outside of the vehicle, performance measures should include these fees as if the fees had been billed directly to/inside the vehicle.
Default performance should always be calculated in the vehicle denominated currency in order to reflect the true performance of the vehicle.
Performance measurement computation
To illustrate the combined performance of multiple vehicles, composite performance maybe presented which combines the performance of each vehicle in a standardised way over time.
To ensure fair representation of composite performance, vehicles included in the same composite must share one or more common attribute.
Composites should be defined by common attributes. A suggested hierarchy of grouping criteria is provided below:
- Style (please refer to the INREV Style classification paper, not manager defined);
- Structure (open vs closed ended);
- Points of reference;
For closed ended vehicles composite performance should preferably be defined by the combination of vintage year and one of the above mentioned attributes.
All vehicles (both historic and live) in a manager’s track record must be included in a composite if a vehicle matches the grouping criteria. Where a vehicle matching the grouping criteria has been excluded from the composite, reasons for doing such is disclosed.
Time weighted return composite performance should be calculated by weighting the performance of each participating vehicle or segregated account with its share of the total composite’s size. The weighting is done at the same frequency as the valuations of the vehicles and time weighted.
For closed ended vehicle composites a since inception IRR is presented. As cash flows of vehicles participating in the composite are all sharing common vintage year and attributes, aggregating cash flows do not constitute a problem.
Further considerations for multiple computation
Some vehicles have the ability to recycle capital during the investment period (to reinvest returned equity capital). For equity multiple calculation purposes, any distributions that are included as a return of equity or return on equity for the purpose of the calculation (‘nominator’) should, if reinvested (recycled), also be added to the amount of drawn capital (‘denominator’) to give a fair reflection of the true ratio of returned equity to investors. This should be the case whether the recycled equity is actually distributed and recalled, or reinvested direct by the manager without physically distributing back to investors (to eliminate the back-and-forth flow of cash).