LP reporting best practices are the protocols fund managers use to report financial results, capital events, and portfolio news to their limited partners. Emerging VC and PE managers can't afford to skip these standards. Institutional allocators, endowments, family offices, and funds of funds, judge the investability of your firm based on the quality of your LP reports before the next fund ever comes to market. Why LP Reporting Standards Are a Make or Break For Many Emerging Managers Institutional allocators review hundreds of manager packages every year. They can identify a first-time fund with a weak back office in just a few minutes of reviewing a quarterly package. Reporting quality is a proxy for operational discipline, which is a proxy for the quality of a long-term relationship. According to a 2023 Preqin survey, 68% of institutional LPs cited reporting transparency as a top reason for deciding to re-up. According to a separate ILPA study, 54% of LPs chose not to re-invest in an otherwise well performing fund because of reporting failures.
In the 22 years we have been working with fund managers, we have found the single most common reason why a first-time fund is unable to raise a second fund is a failure of investor relations, and reporting is often the first point of failure. What Institutional LPs Expect from Quarterly LP Reports Institutional LPs expect a specific set of data at specific frequencies. If they do not receive this data, they will notice. Capital Account Statements Every LP must receive a capital account statement each quarter, which reflects contributions to date, distributions to date, net assets value as of the end of the quarter, and the amount of unfunded capital remaining. Your LP statements must reconcile to the fund's general ledger without exception. In practice, we see first-time managers send a single fund-level report instead of individualized statements. Institutional LPs will immediately call you out on this. Family offices managing $500M across 40 funds will never manually break down a fund level schedule to find your position.
Performance Metrics, IRR, TVPI, DPI, RVPI Reports must include IRR, TVPI, DPI, and RVPI performance metrics each quarter, for the fund and at the individual portfolio company level. You should be able to demonstrate how you calculate IRR, and the result should be GIPS compliant. A frequent mistake: managers will report gross IRR, but not a net IRR. Institutional LPs underwrite net returns. Your report will look shady if there is only gross performance. They will think you are trying to hide the drag of fees and carry. Portfolio Company Summaries Each quarterly report must include a short update on every portfolio company in your portfolio, one to three paragraphs outlining operational highlights, key risks, and any material events. For PE funds, you should include revenue, EBITDA, and leverage metrics. For VC funds, you should include stage, latest valuation, and milestone progress. Write portfolio summaries like you would to a board, short, specific, honest about what's going wrong.
Valuation Policy and Fair Value Transparency Your fund should document its valuation policy in the LPA and stick to it every quarter. US GAAP requires fund assets to be valued in accordance with ASC 820. For a VC portfolio, this is the latest priced round with reasonable adjustments for material company developments. For a PE portfolio, this is an EBITDA multiple using publicly comparable companies. An independent valuation review is one of the clearest signs of a mature back office. Institutional LPs now increasingly demand that marks be reviewed by a third-party valuation agent at least annually. ILPA's 2024 reporting guidelines explicitly recommend independent valuation review for funds over $100 million. How often and when will LPs receive reports? Quarterly financial reports should be sent within 45-60 days of quarter end, audited annual financials within 90-120 days of fiscal year end, capital call notices no later than 10 days prior to wire date, and distribution notices same day wire sent.
Managers who can consistently report in 45 days were the ones that invested in fund admin infrastructure BEFORE they needed it. A 2022 report by Allvue Systems showed that 41% of LPs reduced allocation to funds that reported late despite good performance. Every distribution notice should contain a full waterfall breakdown and explanation of how the proceeds were allocated. Waterfall mistakes are common and generally always favor the GP. When an allocator catches a waterfall mistake, and they will, the damage is bad. In addition, all annual reports should include a running clawback reserve calculation to track how the GP's clawback exposure changes over the life of the fund. How often and when will LPs receive K-1s and other tax reports? US taxable and US tax-exempt (with UBTI) LPs need to receive tax reporting timely. Target to get K-1 reports out by 3/15 for calendar-year funds. Since 2021, funds with international activity or foreign LPs also have to file Schedule K-3.
Any time you have a non-US LP or a portfolio company operating outside of the US your tax guy HAS TO include the Schedule K-3. FAQs How often should we send LP reports? Quarterly is the benchmark. Many funds will also put out an annual GP letter, but you need to at least send quarterly financials. Sending less frequently than quarterly implies that you are still running a friends-and-family fund. What is the ILPA reporting template, and do we need to use it? ILPA has a standardized quarterly reporting template for the quarterly reporting letter covering capital activity, performance, fees paid, and portfolio summaries. It is not required that LPs use the ILPA template, but LPs are starting to expect it. Adopting ILPA reporting in fund one shows LPs that you understand the institutional space. What do we do when portfolio news is bad? Send the news and fast. If there is a material change in the business (i.e., a portfolio company misses revenue by more than 20%, a key executive leaves, or a down round is completed) send a factual description and your plan to the LPs within 30 days.
Do we need audited financials? Yes. If you are running any LPs with institutional capital, you are required to deliver annual financial statements prepared under GAAP by an independent CPA firm. This is both required by the SEC's Custody Rule for Registered Advisers and an expectation of institutional LPs, regardless of registration. How should we handle capital calls? Capital calls should be sent 10 business days in advance of the wire date with the amount due, wire details, description of the investment, and the % funded amount. Sending the capital call notice late creates LP wire failures and damages the relationship.