Private Equity Accounting

365 Pages·2011·3.99 MB·English

by  Mariya Stefanova

PRIVATE EQUITY ACCOUNTING
The global guide for private equity firms and fund
accountants
Mariya Stefanova
PE Accounting Insights
Published in October 2011 by PEI
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© 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