The Multiple, Not the Slope

Nothing in this paper constitutes an offer to sell, or a solicitation of an offer to buy, any interest in a Woodfine direct-hold solution; any offering is made only by the applicable Private Placement Memorandum. Statements marked "planned," "intended," "targeted," "may," or "expected" are forward-looking and subject to change. Full disclosures appear at the end of this paper.

Working Paper WCP-015 · v0.1.0 · CC BY 4.0

Start with two hypothetical investments, because the arithmetic makes the argument better than the argument does. Both run for ten years. The first hands back half of your original capital at the end of year four, nothing for the next six years, and then a final payment that brings the total you have received to twice what you put in. The second pays nothing at all until year ten and then pays out — also twice what you put in. Over the ten years you received exactly the same amount of money from both. Ask for each one's internal rate of return, the figure that headlines almost every private-market presentation, and the first is materially higher than the second.

Now change the second arrangement so that it still pays nothing until year ten, but then pays out roughly half again as much: not twice your capital, but close to three times it. Its internal rate of return is now identical to the first arrangement's. Two investments, the same headline figure, and one of them hands you half again as much money.

Our thesis is that the figure which should lead is the multiple of capital actually returned — what came back, divided by what went in — rather than a rate of return. A rate measures speed. An investor is paid in size. Both are legitimate things to measure and there are real cases where the speed matters, which we set out below. But only one of them answers the question the holder of a unit is actually asking, and it is not the one the industry puts in the headline.

1. The thesis

A rate of return is a measurement of pace. The multiple of capital returned is a measurement of outcome. When they disagree — and they disagree constantly, because they are computed from different information — the outcome is the figure an investor should be shown first.

Our position is that these vehicles should report what came back and what the buildings were independently appraised at, in audited statements, rather than headline a rate of return at all. That is a position about presentation, and it costs us something: a rate of return is the figure the market is used to, and choosing not to lead with it makes a document harder to compare against the documents beside it. We think that is the right cost to pay, for a reason that has nothing to do with modesty. A perpetual vehicle has no terminal exit date — there is no compulsory liquidation event at which everything is sold and a final rate is struck — so a since-inception rate of return for a structure like this one would be a number without a natural end point, recomputed forever from an ever-lengthening early history. Section 3 is about why that specific property makes such a figure unusually misleading.

2. The problem, in the reader's terms

Two ideas are needed, and both are ordinary once separated.

A multiple of capital is a ratio of totals. You put in a sum; over some period you receive distributions; the multiple is everything you received divided by what you put in. It ignores timing entirely. It is the answer to "how much did I get back." Two times your capital is two times your capital whether it arrived in year three or year thirty.

A rate of return is a measure of growth per unit of time, and there are several of them. The plainest is a compound growth rate: begin with a value, end with a value, and work out the steady annual rate that would connect the two. It is blind to everything that happened in between. The internal rate of return is more sophisticated and less intuitive: it is the single annual rate at which every payment in and out, discounted back to the start, exactly cancels. Because each payment is weighted by when it happened, money returned early counts for a great deal, and money returned late counts for much less. That is not a defect — it is precisely what the measure is built to capture — but it means an internal rate of return is principally a statement about timing, dressed in the same clothes as a statement about amount.

The everyday version of this confusion is familiar to anyone who has held a savings account and a mortgage at the same time. Two accounts quoted at the same annual rate can leave very different sums in them at the end, depending on when money went in and came out, how often interest was credited, and over how long. The quoted rate is true and it is not the answer to "how much will I have." A borrower who has ever compared two loans with the same headline rate and found very different total costs has already met this problem; the private-investment version is the same problem with the sign reversed and the stakes larger.

There is one more feature worth naming, because it is the part that makes a rate of return genuinely hard to read rather than merely partial. A rate is a derivative — a measurement of change per unit of time, the slope of a line rather than a point on it. A multiple is a plain ratio. Asking a reader to compare two investments by their slopes, without showing them where either line ended up, is asking a lot; and it is what a presentation does when its front page carries a rate and its appendix carries the distributions.

3. What an internal rate of return actually rewards

Three properties of the measure matter here, and all three are documented in the research literature rather than being complaints of ours.

It rewards early cash above total cash. This follows directly from the discounting: a payment in year four is worth more to the calculation than the same payment in year ten. An arrangement that returns capital early and then does very little will often post a better internal rate of return than one that returns much more, later.

Once it is high, it can stay high almost mechanically. A firm whose earliest investments did well sets its since-inception internal rate of return at a level that the arithmetic of the measure then tends to preserve, more or less indefinitely, as long as no disaster intervenes. The early years do most of the work and later years struggle to move the figure in either direction. The consequence is that a since-inception rate can describe a firm's first decade long after that decade has stopped being relevant [phalippou-2020-inconvenient-fact].

It is easier to flatter on some investments than on others. The same research makes a further point that is easy to miss and has real distributional consequences: the features that allow an internal rate of return to be managed upward are more readily available in some kinds of deal and some markets than in others. Whole categories of genuinely sound investment can therefore look permanently mediocre by comparison, for reasons that are properties of the measurement rather than of the investments [phalippou-2020-inconvenient-fact].

Alongside those three, there is an honest case for the measure, and this paper would be dishonest without it. Capital returned early is genuinely worth more than capital returned late, because it can be put to work again. An investor who gets half their money back in year four and reinvests it successfully may well end up better off than one who waited. That is the real reason internal rate of return exists and it is not a trick. The objection is not that the measure is meaningless; it is that it answers a question about timing and is routinely presented as the answer to a question about total return — and that when the two answers conflict, a reader is given the one that flatters.

4. The illustration, worked through

Take the three arrangements from the opening and set them out properly. All are hypothetical illustrations of arithmetic. They are not projections, not offerings, and not descriptions of anything Woodfine has or intends to produce.

Arrangement A. Runs ten years. Returns half of the original capital at the end of year four. Nothing further until year ten, when a final payment brings the total received to twice the original capital. Multiple of capital returned: two times.

Arrangement B. Runs ten years. Returns nothing until year ten, then pays out. Total received: twice the original capital. Multiple of capital returned: two times.

Arrangement C. Runs ten years. Returns nothing until year ten, then pays out. Total received: close to three times the original capital. Multiple of capital returned: nearly three times.

Now the two comparisons that matter.

A against B. Identical multiples — both return twice the capital — and A posts the higher internal rate of return, because half the capital came back six years earlier. A reader shown only the rates would conclude A was the better arrangement. A reader shown only the multiples would conclude they were the same. The truth is that they returned the same money and A returned some of it sooner, which is an advantage of a specific and limited kind: it is worth exactly what the investor could earn on the returned half over those six years, and no more. The rate does not tell you that; it asserts a general superiority.

A against C. Here the measures fail in the more serious direction. Their internal rates of return are the same. Their multiples are not remotely the same: C returns roughly half again as much money in total. A reader comparing the two on the headline figure would see no difference between an arrangement that doubles their capital and one that nearly triples it. There is no reading of "rate of return" under which that is an acceptable presentation of the difference, and it is not an edge case constructed to embarrass the measure — it is what happens whenever timing and total move in opposite directions, which is most of the time.

The conclusion we draw from that pair is narrow and, we think, hard to argue with. A rate of return cannot distinguish A from C, and a multiple can. Whatever else is reported, the multiple has to be there.

Two things belong in this discussion rather than in a separate confession at the end, because they are part of the argument rather than a qualification of it.

The first is that the strongest published evidence about private markets cuts against the premise of a private structure — ours included. Research on private-market performance finds that, net of all fees, large public pension investors have received in the region of one and a half times their money from private-equity funds, that the largest firms and several independent datasets land in the same narrow band on that basis, and that this is broadly what public equity markets returned over the same period. It further finds that the performance-related payments those funds collected across a single decade of fund vintages ran to hundreds of billions of dollars regardless [phalippou-2020-inconvenient-fact]. The same author's earlier work explains how the industry's own aggregate figures can be far above academic estimates of the same funds without anybody lying, purely as a consequence of the measurement conventions each side uses [phalippou-2011-confusing-evidence]. Note what those findings are expressed in: multiples. That is not incidental. The finding is legible because it is a multiple.

The second is what follows for us specifically. If the honest baseline expectation for a private structure is roughly what a public index returns, then a private structure has to justify itself on something other than an assertion of higher returns — on the shape of the fee, on what the asset actually is, on the absence of a forced-sale date, on what the investor can verify. Those are the arguments our other papers make. And any figure we publish about the future is a projection: nothing has been built, no debenture has been issued, and no performance figure of any kind has been reported for any of these vehicles. This paper quotes no projected return figure for any Woodfine vehicle, and a reader should treat the absence as deliberate rather than as an omission.

5. What is actually intended to be reported

It is easier to say what should not lead a report than to say what should, so here is the positive commitment, with its limits.

What each vehicle is planned to file, as a reporting issuer, is a package rather than a headline: audited annual financial statements prepared under International Financial Reporting Standards with an independent auditor's report attached, management's discussion and analysis of the year including the assumptions behind any forward-looking statement, interim statements through the year, and periodic independent appraisals of the buildings themselves [ni-51-102]. All of it goes on the public filing record, where anyone can read it without asking [sedar-plus]. An appraisal, in this context, is a professional valuation of a specific building by a qualified valuer — an outside estimate of what the asset is worth, which for a building that is not for sale is the only honest answer available.

Two features of that package are worth pointing out because they are where a rate-of-return headline would otherwise hide something.

Distributions are reconciled to distributable income rather than to accounting net income. Under international accounting standards, a property portfolio's reported profit includes revaluation gains — the increase in what the buildings are said to be worth — which are real accounting income and are not cash. They cannot be distributed, because nobody has paid them to anybody. Reconciling to distributable income means the figure a holder reads as available to be paid out excludes those non-cash gains. This is the same discipline as the fee base described in another of our papers, applied to the other side of the ledger.

And the distribution rule itself is a stated minimum rather than a discretion. Where a distribution is declared, at least ninety per cent of the fiscal year's distributable income is paid to limited partners within ninety days of the year end; until cumulative distributions equal the whole of what limited partners paid for their units, the remaining tenth is retained, and after that point it is applied to redeeming the vehicle's debentures. That rule is what makes a multiple of capital returned a meaningful figure to track here at all: there is a defined relationship between what the buildings earn and what reaches a holder, rather than a manager's unconstrained judgement about when to distribute.

Now the blunt part. None of this has happened. No annual or interim filing has been made under this reporting model, no appraisal series exists, no distribution history exists, and therefore no multiple of capital returned exists to report. The one established vehicle is subject to an active cease-trade order issued by the British Columbia Securities Commission, arising from delayed continuous-disclosure filings rather than any finding of fraud or misconduct, and must bring its filings current and obtain the Commission's revocation before any future offering of units can close. A paper arguing for better performance reporting, written by a company whose filings went late, should say that in the section about reporting rather than in the small print — so it is here.

What this changes for the reader

The first change is a question that works on any investment presentation, from any sponsor, in any asset class: what multiple of my capital came back, and over what period? If the answer is a rate of return, the question has not been answered. If the answer is "we report internal rate of return," a reasonable follow-up is to ask for total distributions and total contributions, which are two numbers the sponsor certainly has.

The second is a specific trap worth recognising. Two investments with the same headline rate of return can differ enormously in what they returned; and an investment with a lower rate can return more money. A reader who now flinches at a rate-of-return headline standing alone has taken the whole of this paper's practical content.

The third is about the word "since inception." A since-inception rate of return for a long-running manager is doing something quite different from what it appears to: it is largely a statement about the manager's earliest years, preserved by the arithmetic of the measure. If it is quoted without the multiple beside it, and without the period broken out, it should be read as marketing rather than as measurement.

The trade-offs are real and they run against us as well as for us. A multiple ignores time entirely, and time genuinely matters: two times your money over ten years and two times your money over thirty are not the same investment, and anyone using only multiples will eventually be misled in that direction. Our answer is that a multiple plus the period plus audited statements plus the appraisals is a more honest package than a rate standing alone — not that a multiple alone is sufficient. And there is a real cost to reporting in a way the rest of the market does not: a reader trying to compare this structure against a conventional fund will have to do arithmetic the fund's own presentation would have done for them. We think that is preferable to doing the arithmetic in a way that flatters us, but it is a cost, and it falls on the reader rather than on us.

An open invitation

The questions here belong to the people who study how performance gets reported, and the most useful of them are questions we cannot answer from inside a company that has not yet reported anything.

To researchers on private-market performance measurement: the open question is what would actually shift standard industry practice toward multiple-based headline reporting. The analytical case has been made repeatedly and well for two decades, and practice has barely moved, which suggests the obstacle is not analytical. Whether it is a coordination problem — nobody can report differently while everyone else reports the flattering figure — or a regulatory gap, or simply that the audience prefers a single number, is an empirical question with a practical answer attached. We are choosing to report differently and we expect it to cost us comparability. We would like to know whether anyone has measured that cost.

To researchers on perpetual and open-ended vehicle reporting: the measurement problem this paper raises is sharper for a vehicle with no terminal date than for a closed-end fund, and we have not solved it. A closed-end fund eventually liquidates and a final multiple exists. A perpetual vehicle never does, so its multiple of capital returned is always an interim figure that will keep rising for as long as the thing exists — which raises an obvious risk of a number that looks better every year for no reason other than the passage of time. What the right convention is for reporting outcome on an instrument with no end date is genuinely unresolved, and it is the most important open question in this paper.

To auditors and accounting-standards specialists: the reconciliation between accounting profit that includes unrealised revaluation and cash that can actually be distributed is where the honest number lives, and it is presented in different places and different ways across the industry. A standard presentation of that reconciliation, prominent rather than in a note, would do more for investor comprehension than any amount of change to the headline metric.

Conclusion

An internal rate of return tells an investor how quickly capital came back. It cannot tell them how much came back, and the two are routinely different — two arrangements with the same rate can differ by half again in what they actually pay out. Our position is that the multiple of capital returned should lead, alongside audited statements and independent appraisals of the buildings, with the period stated plainly and the timing available to anyone who wants it. The published evidence that private-market returns have historically tracked public markets on a multiple basis is part of the argument rather than an embarrassment to it: a structure that cannot honestly claim a higher return has to justify itself on what it is, and reporting in a way a reader can check is part of that. Nothing has been reported here yet. When it is, the figure to ask for is the one that says how much came back.

References

Phalippou, L. 2011. Why is the evidence on private equity performance so confusing? University of Oxford, Saïd Business School. https://ssrn.com/abstract=1864503

Phalippou, L. 2020. An inconvenient fact: private equity returns and the billionaire factory. University of Oxford, Saïd Business School; forthcoming, Journal of Investing. https://ssrn.com/abstract=3623820

Canadian Securities Administrators. National Instrument 51-102 — Continuous Disclosure Obligations. https://www.bcsc.bc.ca/securities-law/law-and-policy/instruments-and-policies/5-ongoing-requirements-for-issuers-insiders/current/51-102

Canadian Securities Administrators. SEDAR+ — the filing and public disclosure system for Canadian securities. https://www.sedarplus.ca/

Contributors

Prepared by Woodfine Management Corp.

How this paper was produced

This paper is grounded in the operating and development work the preparing staff do themselves, and in what they have learned from the people they work with routinely: the graphic designers, web developers, and software developers and engineers who build the platform alongside them, and the architects and structural, building-services, and civil engineers they develop buildings with. No outside professional reviewed or approved this paper, and nothing in it is professional advice. It was drafted and edited with AI assistance under editorial direction, and the analysis and conclusions are Woodfine's own.

Disclosures

Woodfine Capital Projects Inc. ("Woodfine") is the author of record and is the promoter of the vehicles whose intended reporting practice is described in this paper; Woodfine Management Corp. employs the staff and retains the consultants who prepared this material. Woodfine has a direct commercial interest in the reporting approach argued for here. This work was funded internally; no external research funding was received. Nothing in this paper constitutes an offer to sell, or a solicitation of an offer to buy, any interest in a Woodfine direct-hold solution; any offering is made only by the applicable Private Placement Memorandum, which prospective investors should review with their own professional advisors. This paper states no projected or target rate of return, distribution yield, capital appreciation figure, or multiple of capital for any Woodfine vehicle, and none should be inferred from it; the three arrangements described in section 4 are hypothetical illustrations of arithmetic and describe no Woodfine vehicle. The multiples attributed to private-equity funds in sections 3 and 4 are findings of the cited third-party research about other funds, not statements about any Woodfine vehicle, and are reproduced because they cut against rather than for the structure this company promotes. No performance figure of any kind has been reported for any Woodfine vehicle; no Woodfine Building has been constructed, no First Secured Mortgage Debenture has been issued, and no annual or interim filing has been made under the reporting model described here. The one established vehicle is subject to an active cease-trade order issued by the British Columbia Securities Commission, arising from delayed continuous-disclosure filings rather than any finding of fraud or misconduct. The distribution and reconciliation rules described are provisions of a governing limited partnership agreement and of a forecast methodology, summarised here in plain language; those documents, and not this paper, govern. Some statements above describe planned or intended future practice; language such as "planned," "intended," "targeted," "may," and "expected" marks this forward-looking content, which is subject to change and does not constitute a commitment regarding future performance.

Data and reproducibility

The three arrangements in section 4 are arithmetic, not data. They are hypothetical: an investment returning half of contributed capital in year four and the balance at year ten to a total of twice contributed capital; one returning twice contributed capital at year ten alone; and one returning close to three times contributed capital at year ten alone. Any reader with a spreadsheet can reproduce both comparisons — that the first two share a multiple while the first posts the higher internal rate of return, and that the first and third share an internal rate of return while the third returns substantially more — in a few minutes, and we would encourage it, because the point of the illustration is that it is checkable rather than asserted. We have deliberately stated these in multiples and timing rather than in rates, so that no figure in this paper can be mistaken for a projection of investment performance.

The findings attributed to published research — that private-market funds have returned in the region of one and a half times invested capital net of fees to large investors, that this is broadly comparable to public equity returns over the same period, that performance fees collected over one decade of fund vintages ran into hundreds of billions of dollars, and that since-inception internal rates of return are sticky and unevenly gameable — are the cited author's, published and available at the sources listed above. A reader who wants to weigh those findings should read the papers rather than our summary of them; they are contested in the industry, and the rebuttals from large firms and the industry association are discussed in the 2020 paper itself.

The reporting commitments — the audited annual and interim filing package on an IFRS basis, the reconciliation of distributions to distributable income excluding non-cash revaluation gains, the at-least-ninety-per-cent distribution rule and its ninety-day timing, and the independent appraisals — are terms of a governing agreement and of a documented forecast methodology for the established Canada vehicle. They are commitments, not a record. Nothing in this paper reports an outcome, because no outcome exists yet: there is no distribution history, no appraisal series, and no multiple of capital returned for any vehicle. No independent party has reviewed this paper's arithmetic, its account of the cited research, or its description of the intended reporting package.

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