Private Equity Fund Accounting Entries

Private equity (PE) refers to investment funds that invest in privately held companies. These investments are for longer period usually from 7 to 10 years or more. Private Equity funds offer the potential for higher returns, but same time they may involve a higher level of risk.

Private equity fund accounting or any fund accounting needs precise recording of investments, commitments, contributions, distributions, management fee and performance fee. These entries must be recorded in line with ‘Subscription Agreement’ and statements from the fund manager. Please also review more on Private Equity Funds:  Private Equity Fund Accounting ǀ Humayun Atif (CMA,CPA)

Private Equity Fund Accounting | Humayun Atif (CMA,CPA)

In private equity fund accounting or any fund accounting we usually record following:

• Capital Contributions – Investments 
• Capital Commitments,
• Realized Gain/Loss,
• Unrealized Gain/Loss – Recording for fluctuations in the price of investments
• Management fee,
• Performance fee,
• Other Expenses
• Dividend Income

We will explain these one by one with accounting treatment in the books of investor.

1. Capital Contribution

When the investor makes a capital contribution to the fund:

• Debit: Investment in Private Equity Fund (Balance Sheet Item)
• Credit: Bank Account

2. Capital Commitment

When an investor enters in any Private Equity Fund or any other similar fund then fund and investor mutually agree and sign a ‘Subscription Agreement’ which has all the rules and regulations of fund management, and Capital Commitment by investor which means how much he/she will contribute to the fund. Example is if a fund is $100m and if investor X commitment is $6m then this $6m will be become a legal obligation or pledge to the fund as he signed the subscription agreement.

For bookkeeping purposes now investor usually opts two approaches:

• No entry in books as it is considered as a pledge rather than a transaction, so they record it in internal tracking system as a memorandum entry to track the commitment and this entry is more for tracking purposes rather than affecting the financial statements.
• Alternatively, when the investor commits to invest in a fund, they record this commitment in a separate “Commitment” account which is used to track the total amount committed but not yet paid. Initial entry is:

Debit:  Investment in Private Equity Fund

Credit: Commitment Account

If investor opts to use separate Commitment account, then it helps in tracking the total commitment separately from the actual investment and provides clarity in your financial records. Both these methods are used depends on the nature of commitment and policy of investor, but one point is important to note that when the fund makes a capital call, you need to route entries from the Commitment account for the capital call payment. This approach is used when capital commitment is made in series of transactions and not in one go.

Example:

Investor Commits for $6m in year 2022 and first capital call from fund manager is for $4m received in year 2023 and second capital call is for $2m received in 2024 then:

Year 2022: Booking of Capital Commitment

Debit:  Investment in Private Equity Fund $ 6,000,000

Credit: Commitment Account $6,000,000

Year 2023: First Capital Call

Debit:  Commitment Account $4,000,000

Credit: Bank Account $ 4,000,000

Year 2024: Second Capital Call

Debit:  Commitment Account $2,000,000

Credit: Bank Account $ 2,000,000

In 2024, Commitment account will be NIL and Investment account balance will be $6m.

3. Realized Gains and Losses

When the fund makes distributions that include realized gains or losses:

• Debit: Bank Account
• Credit: Investment in Private Equity Fund (to reduce the book value of the investment)
• Credit/Debit: Realized Gain or Loss on Investment (depending on whether the distribution exceeds or is less than the book value of the investment)

4. Unrealized Gain/Loss – Recording for fluctuations in the price of investments

In fund accounting, “Unrealized Gain/Loss” refers to the gain or loss that has accrued but has not yet been realized through an actual transaction such as the sale of an asset

When the investment price is changed as per fund statement:

• Debit/Credit: Investment in Private Equity Fund (to adjust the book value of the investment to its fair value)
• Credit/Debit: Unrealized Gain or Loss on Investment (an equity account, reflecting changes in the value of the investment)

After IFRS 9, changes in fair value are directly shown in the equity section.

5. Management Fees

Upon receiving statement or invoice for management fees (if not deducted directly from the investment):

• Debit: Management Fee Expense (Expense account)
• Credit: Bank Account

Management fees might be deducted directly from the investor’s capital account, depending on the fund’s structure and these information’s are vital for accurate recording of transactions in investor’s book.

6. Performance Fees

Upon receiving statement or invoice for Performance fees (if not deducted directly from the investment):

• Debit: Performance Fee Expense (Expense account)
• Credit: Bank Account

7. Other Expenses

When the investor incurs expenses related to the investment like legal fee etc:

• Debit: Expense Account
• Credit: Bank Account

8. Dividend Income

If a fund is dividend based, then we will pass following entry upon dividend received:

• Debit: Bank Account
• Credit: Dividend Income (Income account)

ABOUT THE AUTHOR

Humayun Atif | CMA, CPA, CA (FIN), MS-IT, CA Articles from Big 4, Certified Forensic Accountant (USA), Six Sigma & Oracle Certified.

Atif is passionate about Business, Tech, and the written word. He is the author of the book ‘IFRS Made Easy’. He is a Tax and IFRS coach and the founder of accountingblogger.com