Key Takeaways

  • Distributed to Paid-In capital (DPI) has displaced internal rate of return (IRR) as the primary allocator metric because cash distributions remove accounting subjectivity.
  • Jack Purcell of Ridgemont Equity Partners argues that GPs must prioritize conservative valuations, stating he would rather explain being 30% to 40% undermarked before an exit than 10% to 20% overmarked.
  • Young Lee of Abbott Capital warns that extreme sandbagging harms GPs on the road because institutional LPs cannot underwrite performance claims that contradict audited financial marks.
  • Markdowns at exit create immediate portfolio-wide contagion for GPs, turning what should be a strong return into an LP red flag.
  • Abbott Capital advises managers to target marks exactly one standard deviation conservative, avoiding both aggressive paper gains and two-standard-deviation discounts.

The Disagreement

Sponsor marks have become a battleground in private equity. As exit timelines stretch, allocators no longer accept unrealized multiples at face value.

Purcell takes a protective stance on portfolio marks. In his view, the downside of an inflated valuation far outweighs any benefit during interim reporting. “I think this, part of the reason that kinda DPI is the new IRR is because cash doesn't lie. Like, what you got in a cash return, it is a number. There's no weird accounting methodology that you can come up with,” Purcell says. For Purcell, maintaining GP credibility requires keeping paper marks well below expected realization prices: “I would much rather explain why we were 30 or 40% undermarked in terms of the profit sitting in our P&L in a given quarter before an exit occurs than 10 or 20% overmarked.”

Lee agrees that overmarking is lethal to trust, but he pushes back against heavy sandbagging. When a GP cuts an exit price below interim carrying values, it triggers alarm bells. As Lee notes, “If you overstate and then have to pull it back, a 6X going to a 5X is a disappointment instead of a celebration, and now people are like, 'Wait, what's going on with the rest of the portfolio?'”

Yet Lee highlights an equal danger on the other end of the spectrum. When GPs intentionally depress valuations by 40% to 45% until an asset sells, they lock themselves into an audited track record that understates their true performance when seeking new capital. “When it comes fundraise time, it's too late. You can't change your marks then. You can't change your methodology then, and now people are looking at something that's half the value that you're saying it is,” Lee explains. His mandate to GPs is straightforward: “Be one standard deviation conservative. Get us close to the mark so, 'cause we need to know what's happening real time in our portfolios, not some random sandbag mark. So we agree, be conservative, but not two standard deviations away.”

Who's Right (and When They're Wrong)

Purcell's posture protects GPs in stagnant markets where buyers demand steep valuation haircuts. An overmarked portfolio creates an immediate liquidity trap: if a GP needs to return capital, selling an asset below its internal carrying value forces write-downs across comparable unrealized holdings. By holding assets at a 30% discount, GPs ensure that every completed transaction produces an upward revaluation and positive cash surprise.

Lee is right on the mechanics of institutional diligence. An LP investment committee cannot approve a re-up commitment based on verbal promises of hidden portfolio value. Allocators run quantitative screens against quarterly audited reports. If a GP carries an elite software asset at 2.0X while telling prospective LPs in pitch meetings that it is secretly worth 4.0X, the GP creates an underwriting impasse. The LP cannot present unsubstantiated valuation claims to its board. Sandbagging trades away current fundraising velocity to avoid future markdowns.

Why It Matters

This tension signals that paper marks have lost their utility for LP capital allocation decisions. In an environment defined by higher cost of capital and scarce exits, institutional allocators are forcing GPs to reconcile interim accounting with cold cash reality. The middle ground is shrinking: managers who mark too aggressively face reputational death at exit, while managers who bury their gains struggle to clear LP screening hurdles during capital formation.