Building and Running a Compliance Program in Private Markets
Julian R. Sterling
One Excel workbook. It puts figures on the area the book calls the most heavily scrutinised in
private markets compliance, and turns “test periodically” into a number you can defend.
It is free. Nothing is gated behind a sign-up, and no email address is asked for.
Chapter 10 says the amounts can be large and the stakes enormous. Chapter 13 says to
test. Neither contains a figure. But a compliance officer cannot escalate an adjective:
“the amounts can be large” does not tell a COO whether to care, and
“test periodically” is not an answer to an examiner or a budget.
The grey zone, expressed as a fee. On a 500 million fund with 1.2 million a year
of genuinely ambiguous costs, resolving a quarter of them the firm’s way is worth 3 million
— the same as charging 2.06 per cent instead of 2.00, undisclosed. That
translation is the useful part: forty small judgement calls are impossible to raise in a partners’
meeting without sounding pedantic. Six undisclosed basis points ends the discussion.
The broken deal, four ways. The book’s own illustration, with numbers on it.
The flagship’s share runs from 1.25 million to 2.50 million depending on which
defensible method is applied — half the cost of the deal, turning on a choice
no document compels. And of the four methods, only one costs the firm anything, which is the first
thing an examiner will notice about your policy.
Two words in a fee schedule. Move consulting and board fees from offsettable to
not, and the firm keeps 2 million more — two per cent of every management
fee the fund will ever pay. It is a switch in the file; flip it and watch.
And how much testing is actually enough. There is an exact answer:
n = ln(1−confidence) / ln(1−error rate). To be 95 per cent confident that
under 5 per cent of allocations are wrong, test 59 items. Test twenty and find
nothing — which is what many programmes really do — and all you have established is that
the error rate is probably below 14 per cent. The 59 items cost about
four working days a year. Fourteen checks.
Fees_Expenses_and_Testing.xlsx · XLSX · 16 KB
What to try first
Open the sampling sheet and put your own number in. Most programmes test somewhere between ten and
thirty items and describe it as periodic testing. Read off what that actually proves, then read off
what fifty-nine proves and what it costs. The gap between the informal habit and the
defensible standard is about two and a half days of one person’s year — which is
a much easier conversation than the one that follows an examination finding.
What the arithmetic does not settle
It cannot tell you which grey-zone costs belong to the fund; that is what the documents, the
disclosure and your judgement are for. It cannot make an allocation method fair — only fixed in
advance and consistently applied, which is the chapter’s point and remains right. And the
sampling sheet is attribute sampling: it tests whether items are right, not how wrong they are, so a
programme should test by value as well. It also assumes a genuinely random sample; testing the items
finance hands you tells you about those items and nothing about the population.
Conventions used throughout
Amber fill
an input — you may edit these
Grey fill
a formula — do not overtype these
Checks sheet
fourteen controls, each stating its own verdict
Every figure is illustrative, as everything in the book is. The fund, the firm, the deal and the
amounts are invented. The arithmetic is not, and the sampling result applies to any population.
Opening the file
The workbook opens in Microsoft Excel, LibreOffice Calc, Google Sheets and Numbers. It uses no
macros and no add-ins, so nothing needs to be enabled or trusted. If your spreadsheet asks to
update links on opening, decline — there are none.
Closing the DealTwo defensible bridges 20.70 million apart, a peg worth 7.00 million, and the six choices that remove 6.60 of a 12.00 earn-out.
CMBS and CRE CLOsWhere the loss actually lands, from appraisal reduction to realised severity, and what the B-piece is really being paid for.
How to Read a Commercial LeaseThe three refinements chapter 19 names and never performs, and the renewal rate below which the mark-to-market is worth nothing.
How to Read a Credit AgreementWhere the default actually comes from, the cure that costs 5.5 times the other, and the capacity nobody adds up.
How to Read a Real Estate Loan AgreementThe cure ratio in closed form, the four-point window in which the cheap cure works, and the cure sized to the wrong threshold.
Office Real EstateA six per cent yield that returns 3.2 per cent once the re-letting cycle is paid for, and the headline-to-net-effective rent arithmetic.
Private Equity Real EstateBoth worked waterfalls to the dollar, the two capital stacks, and the arithmetic of the promote made changeable.
Private Markets PerformanceThirty-one of the thirty-three figures chapter 19 publishes reproduce exactly — and the two that do not are named rather than quietly adopted.
Raising a Real Estate FundThe chapter 17 funnel run on a calendar — when the first close actually lands, and why more travel does not help.
Real Estate FinanceFour people look at one building and reach four numbers; the lender is whole only above 105,109,489, twelve per cent below today’s value rather than forty.
Real Estate Financial ModelingProperty, development and fund models built line by line, and the modelling test worked end to end.
Real Estate Fund ManagementThe waterfall of 6.11, the build-to-core of 8.7 and the proceeds gap, reproduced as live formulas rather than asserted.
REIT Analysis and ValuationFFO of 532.0, AFFO of 381.0, net asset value and dividend safety — every figure a formula you can change.
Retail Real EstateThe occupancy cost of every unit in a centre, the sixteen per cent of the rent roll no tenant can sustain, and the right-size-convert-or-hold decision priced.
Sale and LeasebackA €179.5 million transaction end to end, with rent cover measured on the entity that actually signs the lease.
Self-Storage Real EstateThe cohort engine behind a 590-unit store, and the rate increase on existing customers priced against the move-outs it causes.
The Fund Finance ProfessionalChapter 8 builds the reported-to-eligible NAV bridge; chapter 9 computes every ratio without it. Two points at every state — and what a subscription line does to the IRR.
The Growth Equity InvestorWhat a pro rata cheque really costs, and the band where defending your ownership loses money.
The Private Credit InvestorThe two coverage ratios are not measured on the same thing: the erosion is 47.7 per cent, not the 28.7 the headline implies.
The Private Equity Fund Controller PlaybookThe book defines IRR, DPI, RVPI and TVPI, tells you to update them at the exit, and prints not one value. Computed: a 1.833× deal inside a fund at 0.892 TVPI.
The Venture Capital AssociateWhat defending a position costs, and how many companies a reserve pool actually defends.
Financial Risk ManagementA fund inside every limit that cannot meet a redemption — and the number that decides it is the one with no currency attached.
Business ValuationThree advisers land 26.8 per cent apart on one company, and the whole gap turns out to be 1.96 points of perpetual growth.
Quantitative FinanceThree models agree to a quarter of one per cent about a number that one unobservable input moves a hundred and three times as much.
Asset ManagementFour people quote four returns for one mandate, all correct and 2.7017 points apart — forty-eight times the manager’s net skill.
Alternative InvestmentsA manager reports 13.29 per cent and the endowment earns 6.26 — both correct, and only a third of the advertised advantage arrives.
Credit AnalysisFour defensible EBITDAs on one borrower give leverage from 3.19x to 6.47x — and the add-back argument is fifty times the covenant headroom.
Venture CapitalOne company out of twenty-eight returns 56.7 per cent of the fund, and half the capital goes in after the decision — at half the return.
Machine Learning for FinanceFive people quote the accuracy of one credit model, all five are right, and the number that decides how much money it makes is none of them.
Commercial Real Estate InvestingThe equity earned 8.6647 per cent and the investor received exactly 8.0000 — the preferred return, and nothing above it.
Mergers and AcquisitionsThe board paper says the deal creates 13,436,667 of value. The arithmetic says it destroys 17,530,855. Nobody is lying.
DerivativesThe treasury report says the hedge cost 1,233,698. That is the interest differential, not a cost.
Treasury ManagementFive cash balances for one company, all correct and 145,600,000 apart — and the revolver that is two-thirds of the liquidity leaves at a revenue fall of 8.4127 per cent.
Financial Planning and AnalysisRevenue 3.0190 per cent above budget and operating profit 16.3209 per cent below it, in the same quarter, with every figure correctly stated.
Energy TradingA position report that is 91.7031 per cent hedged and correctly computed, on a book that is short 2,542,000 MWh — and a margin call of 198,400,000 the next morning.
Construction Cost ControlA contract sum of 26,301,102 became a final account of 29,153,363 on the building that was drawn — and 85.8 per cent of what was lost was knowable on the day it was signed.
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