In a few months, my subscription to O Magazine will expire and I do not intend to renew. As much as I like the monthly feast of inspiring stories and suggestions about new products, I am tired of seeing Oprah Winfrey appear on each cover, photoshopped-thin and elegant. She is a beautiful woman at any weight but I am offended by her editors' belief that readers can't tell the difference between obvious reality and a spruced-up commercial version.

In reading the latest plaints about how private equity funds report and charge fees, I wonder if some limited partners feel that they have been getting the magazine cover version of performance numbers. Certainly regulators seem to think so. In "SEC probing private equity performance figures - sources,"Reuters reporter Greg Roumeliotis (October 29, 2014) explains that the U.S. Securities and Exchange Commission wants to know more about how internal rate of returns, net of fees and expenses, are determined and then showcased in marketing materials. A particular area of interest is said to be how much a general partner commits its own capital to a portfolio and whether that infusion is included in the profitability indicators that institutional and high net worth individuals see.

In his "Spreading Sunshine in Private Equity" speech (May 6, 2014), SEC Director Andrew J. Bowden, with the Office of Compliance Inspections and Examinations, lists "hidden expenses, expense shifting, "Cherry-picking comparables" and "Changing the valuation methodology from period to peiod without additional disclosure" as a few of the areas that are drawing attention. Each of these deserves a complete analysis, something that is hard to do in a single blog post. For now, let me address the issue of the Internal Rate of Return or IRR measurement. Subsequent blog posts will address topics such as valuation.

One limitation of the IRR as a gauge of financial health is that its calculation can result in multiple answers when cash flow inputs alternate between negative and positive estimates. For a private company in search of growth, recapitalization and intermittent drains on cash are far from uncommon. Another limitation of the IRR metric is that it assumes an interim reinvestment of monies at the IRR level itself, something that may not materialize. Then are issues such as firm size or quality of management. The flexibility and economies of scale that a larger fund enjoys are not always reflected in an IRR calculation. A mechanical IRR calculation could importantly ignore operational efficiencies for a particular general partnership that is better at running its operations than competitors. In comparing two or more private equity funds on the basis of IRR, vintage benchmarking, differences in industry-focus and timing of liquidation events may be likewise given short shrift.

In "Returns Drive Fees In Private Equity and Hedge Funds" (July 30, 2014), Forbes contributor Timothy Spangler informs that an IRR calculation based on an exit event such as an Initial Public Offering ("IPO") relies on "the value of the security at the time of its distribution" even though lock-up period restrictions could result in investors realizing "significantly less than that amount at the end of the lock-up period..." He adds (and I emphatically agree with him) that valuations of relatively illiquid positions can be subjective yet have a material impact on output numbers that are shared with prospective and existing limited partners.

Based on work I have done, deficiencies exist at some firms. The good news is that problems can often be solved in a straightforward manner.

Just as notable is the fact that more limited partners are demanding better governance when they believe that improvement is warranted. On October 29, 2014, PE Hub's Sam Sutton reported that the Pennsylvania Public School Employees' Retirement System failed to agree on terms such as a seat on the fund's advisory committee, thereby resulting in a decision not to "invest in Centerbridge Partners' third flagship fund after allocating up to $100 million to the vehicle in August." According to "Pennsylvania pension cancels $100 mln Centerbridge commitment: Buyouts," Oregon State "pulled two previously approved commitments this year after failing to agree on fund terms with its private equity managers...The Teachers' Retirement System of Louisiana walked away from an approved $75 million commitment to Vista Equity Partners' fifth fund after negotiations with the firm..." (As an aside, the Private Equity Growth Capital Council ranks Pennsylvania as the third largest state investor with $44.4 billion allocated to this asset class. See "Top Private Equity Investment by State" for 2013.)

General partners counter that oversubscribed deals put them in control. Time will tell. One thing seems certain. More questions about the quantity and quality of performance information are likely to be asked. As I've said many times, scrutiny of others is a plus for firms that are proud to showcase their disclosure and valuation best practices. They get to take a bow and perhaps book business that their less governance-savvy peers cannot.