What is Private Equity Fund?
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity.
A private equity fund is raised and managed by investment professionals of a specific private-equity firm (the general partner and investment advisor). Typically, a single private-equity firm will manage a series of distinct private-equity funds and will attempt to raise a new fund every 3 to 5 years as the previous fund is fully invested.
Most private-equity funds are structured as limited partnerships and are governed by the terms set forth in the limited partnership agreement (LPA)
Such funds have a general partner, which raises capital from cash-rich institutional investors, such as pension plans, universities, insurance companies, foundations, endowments, and high-net-worth individuals, which invest as limited partners (LPs) in the fund. Among the terms set forth in the limited partnership agreement are the following.
Term of the partnership
The partnership is usually a fixed-life investment vehicle that is typically 10 years plus some number of extensions.
An annual payment made by the investors in the fund to the fund's manager to pay for the private-equity firm's investment operations (typically 1 to 2% of the committed capital of the fund)
The process by which the returned capital will be distributed to the investor and allocated between limited and general partners.
Key Accounting Entries in the Books of Private Equity Fund Accounts
Private equity fund accounting involves several complex journal entries to be recorded in the books of the fund. To record journal entries in the books of the fund is just a matter of DR/CR , but you should know how to record them in the books fund on a daily basis, why accounting entries are important because without journal entries accounting is incomplete if you know the accounting package that start with the Recording of financial transactions like Buy/sale, Dividend, Interest, Management fees etc: If you join any fund accounting business then you will have to calculations of Buy / Sale, Expenses / Incomes, Unrealised gains / Losses and post the accounting entries for then: Here are some of the common journal entries that need to be recorded:
The first entry can the accountant post when funds are received in the bank account from an Investor that will treat as Capital and recorded in the books of account.
Capital Contributions: When investors invest money in the fund, the fund needs to record the capital contributions in its books. The journal entry for this transaction would be:
Debit: Cash (or bank account)
Credit: Capital Contributions (a liability account)
Management Fees: The private equity fund charges management fees to cover the costs of managing the investments. The journal entry for this transaction would be:
Debit: Management Fees Receivable (an asset account)
Credit: Management Fees Revenue (an income account)
Carried interest is the share of the fund's profits that the fund manager receives as compensation. The journal entry for this transaction would be:
Debit: Carried Interest Payable (a liability account)
Credit: Carried Interest Expense (an expense account)
Also, you can record the entry in a way like
When funds announce carried interest
Debit: Carried Interest Account( Its Liability )
Credit: Cash Account( Paid it means cash will out )
Investments: When the fund invests in a company, it needs to record the investment in its books. The journal entry for this transaction would be:
Debit: Investment (an asset account)
Credit: Cash (or bank account)
Distributions: When the fund distributes money to investors, it needs to record the distribution in its books. The journal entry for this transaction would be:
Debit: Capital Contributions (a liability account)
Credit: Cash (or bank account)
These are just a few examples of the journal entries that need to be recorded in the books of a private equity fund. There may be many other complex transactions that require unique journal entries. It is important to have experienced accountants and auditors to ensure accurate recording of these transactions. While recording the entries in the book’s funds in the GENEVA & INVESTRAN Applications then Analyst needs to select the accounts like, Cash, Investment, capital, Expenses, Income, Buy, Sale, Loss & gain that’s it, In day to day basis
You should know both distribution recall and return of capital can impact the NAV of a fund in private equity funds..
A) Distribution Recallable
Distribution recall occurs when a fund manager recalls all or part of a distribution that has already been paid out to shareholders. This can happen if the fund manager determines that the distribution was overpaid or that the fund does not have sufficient income or gains to support the distribution. When a distribution recall occurs, the NAV of the fund will decrease by the amount of the recalled distribution.
B). Return of Capital
Return of capital (ROC) occurs when a fund distributes capital to its shareholders that is not generated from the fund's income or gains, but rather from the return of the shareholders' original investment in the fund. ROC can happen for various reasons, such as when the fund sells assets at a gain and distributes the proceeds to shareholders, or when the fund liquidates assets and distributes the proceeds to shareholders. When a fund distributes ROC, the NAV of the fund will decrease by the amount of the ROC distribution.
It's important to note that ROC is not the same as a dividend or a capital gain distribution, which are generated from the fund's income or gains. ROC can have tax implications for shareholders, as it may be subject to different tax treatment than other types of distributions.
In summary, both distribution recall and ROC can impact the NAV of a fund, with distribution recall leading to a decrease in NAV and ROC distribution also leading to a decrease in NAV. It's important for investors to understand the nature of the distributions they receive from a fund and their potential impact on the fund's NAV and tax implications.
B) Income Distribution: Income distribution means the fund announced the earned dividend and interest payment or rental income to the GP & LP through Income distribution so you might see the callable income also where the fund calls back from the investors.
Why fund announces Callable income & Capital? post your thought in a comment.
Important Note: - Dues from" is used when you are the creditor and "Dues to" is used when you are the debtor in a financial transaction.
Hedge fund accounting entries - https://www.ibfundaccounting.com/post/fund-accounting-nav-package-end-to-to-end-process-with-accounting-entries