Narrative tone
While interim valuations may not be perfect, Would I Lie to You? breaks fresh ground. It uses large language models (LLMs) to analyse the qualitative commentary that accompanies the financial metrics provided by GPs to determine whether the narrative tone is a better predictor of future performance than interim valuations.
“We found that the tone of the qualitative information included in these reports has a highly robust and consistent relationship with future performance,” Lopez-de-Silanes explains. “A positive narrative tone is strongly linked to future uplifts in valuations, while a negative tone is a strong predictor of mark-downs.”
On average, a report with an optimistic tone (relative to a neutral tone) is associated with a 0.18x uplift in multiple on invested capital (MOIC). Interim MOIC, by contrast, can predict only half as much uplift as tone (0.09x). This suggests that the accompanying qualitative commentary may offer greater information about subsequent performance than the quantitative metrics. The research also shows that tone consistently predicts performance uplift across all regions, institutional contexts, and accounting regions.
The narrative tone reliably predicts future performance across all markets and points in time, while valuation practices vary.
Sven Czermin, Palladio Partners
Crucially, the narrative tone continues to exhibit a positive correlation with future performance not only outside of fundraising windows but also—and more strongly—during fundraising periods. “It seems as though GPs are manipulating their net asset values as they attempt to woo LPs, but they are covering themselves in the tone of the accompanying text. That is where they are telling investors what they really feel is going on,” Lopez-de-Silanes says.
These findings could have significant implications for LPs as they try to navigate mountains of interim reports, Lopez-de-Silanes claims. He adds that, while the paper focuses on PE data, the lessons are likely relevant across all private markets and possibly even public ones as well. “The findings are stark,” he says. “The narrative tone reliably predicts future performance across all markets and points in time, while valuation practices vary.”
Czermin believes this to be intuitive. “We certainly believe that qualitative information is crucial,” he says. “This is why we always use the numbers as the basis for a discussion with the manager; the financial metrics provide a hint of where things are heading, but the real picture comes from everything else that is said. That might seem strange, given that finance is all about numbers. But in private markets, it is impossible to form a prediction based on numbers alone.”
Interim valuations tend to understate the true exit values shortly before realisations.
David Scopelliti, Mercer
LPs and their advisers clearly recognise the value of qualitative information as a complement to quantitative information. “The narrative tone provides context and insight into a GP’s confidence, transparency, and management quality,” says Scopelliti. “It transmits signals about governance, risk mindset, and cultural alignment, and it can provide early warnings about potential issues or optimism that are not yet reflected in numbers.”
He adds: “In practice, investors place significant emphasis on the narrative tone during due diligence and ongoing monitoring. Candid, balanced, and forward-looking narratives correlate with higher-quality stewardship, while overly promotional or vague language raises red flags.”
It is therefore not surprising that the paper finds that the narrative tone strongly predicts final performance, even after controlling for quantitative metrics, says Scopelliti. “This is likely to be due to information asymmetry,” he says. “GPs possess private knowledge about portfolio prospects. The tone may reveal genuine beliefs or discomfort. Furthermore, investors process stories more effectively than raw data, which makes tone a powerful signal.”
