What Makes Private Equity Fund Accounting Different?

Find out how private equity fund accounting differs from general accounting methods.

Regardless of your company structure and entity, whether you’re a corporation, nonprofit, or private equity fund management, by law, you must keep and maintain financial records. When searching for an outsourced Controller, Chief Financial Officer, or Business Advisor, experience in private equity fund accounting and general accounting are significant. For compliance, accurate bookkeeping is essential for recording all your fund activities and transactions for financial statement reporting. If you are a private equity investment manager, outsourcing accounting services will assist you with complying with partnership accounting standards.

General Accounting vs Fund Accounting

General accounting standards involve recording all income flowing into a business and all expenses in the general ledger. Fund accounting comprises the general-ledger, investment holdings, and capital allocations. Of the accounting standards, a fund is more complex than general accounting standards because a private equity firm purchases assets with investors’ funds.

Whereas large corporations and small businesses that comply with general accounting standards use their own cash to invest in various assets, private equity general partners and fund managers use cash raised from limited partners (LP) and other investors to invest in various assets.

Basic Private Equity Fund Accounting

The investment amount funded by investors and LPs can vary with different percentages of ownership in the fund. Percentage calculations of the ownerships and capital call for each investor are simple. For example, if an investor contributed $700,000 and limited partner (LP) provided $300,000 to the fund, the investor would own 70 percent, and the limited partner 30 percent. Investors and LPs invest in different investment vehicles such as endowments, foundations, pension funds, and companies, which requires allocation in accounting.

Allocating Private Equity Fund Transactions

Accounting for private equity fund transactions from all partners must be accurately allocated with complete transparency with regard to each partner’s responsibilities and ownership. Management fees and fund expenses are not allowed in the fund allocation, while LPs pay a percentage based on ownership rights. The distribution of realized investment profits is more complex for outsourced accounting controllers to calculate than ownership calculations. To overcome the challenges of private equity fund accounting, custom-designed fund accounting software is essential for the tracking of alternative investments.

Fusion CPA can help you implement private equity fund accounting for your business


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Fund Accounting Investment and Capital Activities

Business processes of a private equity fund are divided into two activity categories, capital, and investment, requiring a registered SEC outsourced private-equity advisor. While PE funds are not required to register with the Securities Exchange Commission, an outsourced PE Advisor or CFO is SEC-registered. Advisors and other accounting professionals are subject to requirements for regular disclosure to the public and to disclose conflict of interest with the managed funds.

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Examples of Investment Activities

Investment activities comprise investments including funds, real properties, companies, land, for example, and cash flows of the fund manager. It means the cash flows from the GP to the funding investment, and cash flow from investments going out to the GP, such as divestment and realization.

  • Corporate Activities: security conversion and stock split.
  • Allocation: fund operations and entries elimination.
  • Interest Income: interest payments and interest accrual.
  • Purchase: bond acquisition, investee funding, cash distribution, and direct purchase.
  • Valuation and Investment Write-off

Examples of Capital Activities

In private equity fund accounting, capital activities cash flows between the fund manager or general partner and LPs. Cash flows include management fees from the LPs to the GP and cash-stock distributions from GP to the LP.

  • Capital Call/Distribution
  • Commitment: investor fund commitments and unfunded commitment adjustment.
  • Allocation: management fees and carried allocation.
  • Investor Reallocation
  • Interest Transfer

Private Equity Accounting Complications

Accounting for private equity has its complications comprising waterfall calculations of distribution, closings, and equity accounting method.

Calculating Distribution Waterfall

Distribution waterfall calculations are complex in fund accounting because of the different structures and methods of calculating tiers and catch-up. Waterfalls are challenging to calculate and determine the value of an asset based on the return of contributions, preferred return, catch-up, and split between LPs and GP.

Closings

Another challenging aspect of private equity fund accounting is closing after its initial close date to conforming to a new investor. What makes closings and calculation of appropriate interest complicated, conforming to multiple capital calls and closings of various funds.

Equity Accounting Method

Equity accounting is a method utilized to pull the profits and losses from tiered entities into the upper tier allowing recognition of unrealized gains and losses

How Private Equity Accounting Software Creates Fund Accounting Workflows Efficiency

Private equity fund accounting software streamlines your fund accounting workflows combining solutions for:

  • General Ledger
  • Financial Statement Reporting
  • Standardized Workflow
  • PE Bookkeeping
  • Accounting Standards and Integrated Software
  • Tax Planning and Preparation

Fusion CPA offers outsourced financial services and accounting software solutions to business fund managers and PE firms

We can help you reach your goals for growth and leverage with limitations and restrictions of overflowing finance. Our private equity fund accounting services combine experience, technology, and expertise to ensure accurate accounting that meets compliance and FASB and IASP standards.


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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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