Private Equity Accounting PDF
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PRIVATE EQUITY ACCOUNTING The global guide for private equity firms and fund accountants Mariya Stefanova PE Accounting Insights Published in October 2011 by PEI Second Floor Sycamore House Sycamore Street London EC1Y 0SG United Kingdom Telephone: +44 (0)20 7566 5444 www.peimedia.com © 2011 PEI ISBN 978-1-904-696-99-5 eISBN 978-1-908-783-53-0 This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher. The views and opinions expressed in the book are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within this publication or for any expense or other loss alleged to have arisen in any way in connection with a reader’s use of this publication. PEI editor: Anthony O’Connor Production editor: William Walshe Printed in the UK by: Hobbs the Printers (www.hobbs.uk.com) To my wonderful children, Alex and Lilly, who inspired me to write this book, my partner Dimitar who has supported me at all times, and my mom who has always been there to provide a helpful hand. For all the fund accountants across the world who work so hard with very little to guide them. A special thanks to Anthony O’Connor, my editor, who made it all happen. And my sincere gratitude to the expert contributors who have added great value to the book. Thank you all. Mariya Stefanova Contents Figures and tables About the editor 1 Introduction to private equity for accountants By Mariya Stefanova History of private equity How to define private equity Open-ended versus closed-end funds Limited-life versus evergreen funds Regulation and private equity Private equity as part of alternative investment asset classes Liquidity Value creation The J-Curve Conclusion 2 Private equity structures and types of funds By Mariya Stefanova Private equity fund structures Legal form and choice of jurisdiction European versus US funds Similarities and differences between English and US limited partnerships Typical vanilla UK versus US fund structures Types of funds and similarities and differences in terms of accounting Summary 3 Why is private equity accounting different? By Mariya Stefanova Introduction Legal form – limited partnership (or equivalents) Limited partnership agreement Fund purpose, activities and structure Accounting frameworks and ‘investor-defined accounting framework’ (LPA GAAP) Summary 4 The limited partnership agreement explained By Mariya Stefanova What is an LPA? Summary 5 Fund lifecycle By Mariya Stefanova Introduction stage Hypothetical example of a new-fund launch Growth stage Maturity stage Summary 6 Initial, subsequent and final closings, rebalancing & equalisation By Mariya Stefanova What is a close or closing? Subsequent or additional and multiple closings What are the implications of subsequent closings for the investors? Equalisation Rebalancing Summary 7 Drawdowns By Mariya Stefanova The definition of a drawdown/capital call Where are the drawdown rules stipulated? Content of the drawdown notice ILPA Private Equity Principles What happens in terms of processes? Drawdown date Capital contributions Loan contributions Drawdown calculation Net drawdowns Accounting implications – the impact on financial statements Treatment of partners’ capital under IFRS Summary 8 Partner transfers By Mariya Stefanova What is a partner transfer? Vital documents to record transactions properly Accounting implications Partner transfers in specialist private equity accounting systems Some complications and possible reasons Summary 9 Investments By Mariya Stefanova IFRS – where do we stand? Basis of measurement for investments Convergence between IFRS and US GAAP IFRS 13 and FASB ASC 820 Consolidation exemption Fair value of investments and investment revaluations Recent developments and future trends IFRS 9 Financial Instruments Summary 10 Valuations – the accountant’s perspective By David L. Larsen, Duff & Phelps LLC Introduction Investment valuations within accounts and investor reports Valuing portfolio companies – overview Valuing portfolio companies – commonly used valuation methodologies Enterprise value Using enterprise value to determine equity values Debt valuation Valuing fund interests Conclusion 11 Expenses and income By Mariya Stefanova Introduction Most common types of expenses, provisions and limitations in the LPA Transaction, monitoring/directors’ and other fees earned by the manager Income Net income (loss) Allocations of income and expenses (net income) Accounting for/recognition of income and expenses IFRS UK GAAP US GAAP Summary 12 Management fee versus priority profit share By Mariya Stefanova General principles and future trends Management fee versus priority profit share What is the rationale for the priority profit share? Management fee/PPS calculation Management fee calculation – an example Accounting treatment Summary 13 Distributions By Mariya Stefanova What is a distribution? Where are the rules of the distributions stipulated? What are the different types of distributions? Timing of the distributions Limitations on distributions Distribution notices Distribution calculation Accounting implications and impact on the financial statements The fund of funds perspective on distributions Distributions in specie Distribution processes Final distributions Re-investment (recycling) of distributions Summary 14 Carried interest By Mariya Stefanova Carried interest: substance and legal form Why is it called carried interest? UK and US tax aspects of carried interest Carry participants Types of carried interest models Carried interest modelling – useful advice Definition of a waterfall Clawback provisions Accounting treatment for carried interest Summary 15 Fund financial statements By Mariya Stefanova Private equity fund financial statements Financial statements formats IFRS IAS 1 presentation of financial statements UK GAAP US GAAP Summary 16 More about allocations By Gaurav Marwah, Augentius Fund Administration LLP Introduction Partners’ accounts structure Standard allocation criteria and rules Other important considerations Conclusion 17 Consolidation By Angela Crawford-Ingle, Ambre Partners Background The consolidation debate Consolidation of the fund Consolidation into the fund manager Investor reporting US GAAP IFRS Country GAAP and fund-defined requirements Concluding observations
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