WEST SACRAMENTO, Calif. – The California State Teachers’ Retirement System’s (CalSTRS) Corporate Governance 2014 Annual Report shows its engagement with small-cap companies yielded remarkable progress in the adoption of majority voting standards for the election of corporate directors.
The Corporate Governance 2014 Annual Report reflects four years of work with small-cap companies—those with a capitalization of $2 billion or less—to adopt the majority-vote standard. The standard requires directors to receive a majority of shareholder support to be elected to the board.
CalSTRS uses the dollar-weighted internal rate of return (IRR) to measure portfolio performance, as recommended by the Association of Investment Management and Research.
The CalSTRS IRR calculation method may differ from the methods used by the General Partner or other Limited Partners.
CalSTRS maintains records, including the IRR, for each limited partnership.
Factors Influencing IRR Calculations
There is no industry-standardized method for valuation or reporting, which makes comparisons of these numbers difficult. All of the following can create differences in IRR calculations:
The accounting treatment of carried interest
Partnership management fees
Other partnership expenses
Sale of distributed stock
In addition, the purchase of secondary interests makes for unique comparison problems due to the specific pricing and timing characteristics of the transaction when contrasted with the Limited Partners Investment.
IRR Over Time
The actual IRR performance of any limited partnership is not known until the final liquidation of the partnership, typically over 10 to 12 years. Until the liquidation takes place, the IRR is only an interim estimated return.
The IRR calculated for a partnership in the first three years of its life are relatively meaningless given the “J-curve effect.” The J-curve phenomenon is the effect of the cash-flow behavior of a partnership. It can be summarized as the first year’s investment expenses of investing in a fund that has yet to harvest its capital gains in the future. This normally translates into a negative IRR in the early years of the fund. The plot of the partnership values over time generally resembles a letter J.
Performance Report Disclaimer
Please note that none of the information contained in the Private Equity Portfolio Performance Report has been reviewed or approved by the General Partners of the funds.
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