What is 'IRR manipulation' and which practices are viewed critically?
IRR is time-sensitive — which makes it manipulable through timing decisions, without any real value creation behind it. The most important practice is the "subscription line": a fund uses an RCF from the fund's bank to delay capital calls. The IRR clock only starts at the LP call — the fund can "hide" the investment for 6–12 months and thereby pull IRR up artificially by ~2–3 percentage points.
ILPA (Institutional Limited Partners Association) guidelines recommend net-IRR reporting WITHOUT subscription-line effects. Top-quartile funds avoid all questionable practices — reputation beats a short-term IRR gain.
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| Practice | Assessment | Description |
|---|---|---|
| Recap to optimize IRR | legitimate | when the lender is willing + it reduces sponsor risk |
| Subscription lines | borderline | fund RCF delays capital calls — IRR rises with no value creation |
| Aggressive mid-period NAV marks | borderline | mark-to-market write-ups with no clear trigger |
| Cherry-picking exit timing | legitimate | selling into a favorable market — but can create cash drag |
| Deal-by-deal carry calculation | structural | higher than whole fund, less LP-friendly |
| Soft hurdles with no clear compute mechanism | unacceptable | pure LP detriment |
| Setup | Day 1 vs Day 365 |
|---|---|
| Without sub-line | LP invests $100m directly — IRR clock starts immediately |
| With sub-line | fund bank bridges $100m, LP call later — IRR clock only starts at the call |
Question: "How would you assess IRR quality?"
Answer: "Three standards separate top-quartile from average: DPI as a complementary metric (cash can't be manipulated), net IRR without sub-line effects, and whole-fund carry calculation. Whoever delivers all three cleanly has the credibility in the LP raise"