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Private Equity — GP & LP Accounting

📌 Complete Guide to Private Equity

1. What is Private Equity?

Private Equity (PE) refers to investments made in private companies (not listed on stock exchanges) or in public companies taken private. The goal is to restructure, grow, and eventually exit these companies at higher valuations.

  • Involves active management by professional fund managers.
  • Usually has long investment horizons (7–10 years).
  • Returns mainly through capital gains (sale of portfolio companies).

2. Who is a GP? What are his Roles?

GP (General Partner) is the manager of the private equity fund.

Roles of GP:

  • Fundraising: Attracting investors (Limited Partners).
  • Deal Sourcing: Identifying companies worth investing in.
  • Due Diligence: Analyzing financial, legal, and operational aspects before investing.
  • Portfolio Management: Guiding companies with strategy, governance, and operations.
  • Exit Strategy: Selling investments to maximize profits.
  • Reporting: Providing periodic updates to LPs.

3. What is the Relationship between Investors (LPs) and GPs?

  • LPs (Limited Partners): Investors who commit capital (pension funds, insurance, HNIs, endowments).
  • GPs: Manage funds, take decisions, and charge fees.

Relationship: LPs provide capital, GPs manage the fund. Profits are shared:

  • LPs get the majority of returns.
  • GPs earn management fees (usually 2%) and carried interest (20% profit share above a hurdle rate).

4. Major Persons Involved in Private Equity

  • GPs – Fund managers, decision makers.
  • LPs – Investors providing capital.
  • Portfolio Company Management – Run the acquired business.
  • Investment Bankers – Assist in M&A and financing.
  • Lawyers – Handle compliance and contracts.
  • Auditors/Accountants – Verify reporting.
  • Consultants – Provide strategy and operations support.

5. What is Capital Activity?

Capital activity refers to all fund–investor cash movements.

  • Capital Commitments: Agreement by LPs to invest up to a certain amount.
  • Capital Calls: When GP asks LPs to provide actual cash.
  • Distributions: Money/profits returned to LPs.
  • Transfers: LP selling their fund interest to another LP.

6. Types of Transactions in Private Equity

  • Leveraged Buyouts (LBOs) – Acquiring companies with debt + equity.
  • Growth Capital – Investment in mature companies for expansion.
  • Venture Capital – Early-stage startup investing.
  • Distressed/Turnaround – Reviving struggling companies.
  • Secondaries – Buying/selling LP interests in existing funds.

7. How to Account for Capital Activity

From GP’s Point of View (Fund Manager)

  • Capital Calls: Debit Receivable from LPs → Credit Commitments.
  • Distributions: Debit Fund Cash → Credit Payable to LPs.
  • NAV Reporting: Track valuation of investments and allocate NAV across LPs.
  • Fee Recognition: Record Management Fees as GP’s income.

From LP’s Point of View (Investor)

  • Capital Calls: Debit Investment in Fund → Credit Cash.
  • Distributions: Debit Cash → Credit Investment in Fund.
  • NAV Updates: Record unrealized gains/losses from GP reports.
  • Performance Tracking: Calculate IRR and MOIC.

8. Capital Activity in eFront

  • Capital Calls → Receivables from LPs.
  • Distributions → Payables to LPs.
  • Commitments → Tracked in LP-level commitments.
  • NAV → Updated after each valuation.
  • Reports → LP statements, IRR/MOIC reports, fund financials.

9. What is a Management Report or Cost Report?

Management Report: Prepared by GP for LP communication. Includes:

  • Portfolio updates
  • Fund performance (NAV, IRR, MOIC)
  • Capital activity summary
  • Market outlook

Cost Report: Tracks fund-level expenses (management fees, audit, legal) and ensures fair allocation.

10. Other Important Parameters in Private Equity

  • IRR (Internal Rate of Return): Annualized return measure.
  • MOIC (Multiple on Invested Capital): Value multiple of investment.
  • NAV (Net Asset Value): Current fair value of investments.
  • Carried Interest: GP’s share in profits.
  • Vintage Year: Year fund starts investing.
  • Hurdle Rate: Minimum return LPs must receive before GP share.
  • Clawback: Requires GP to return excess carry if fund underperforms later.

✅ Conclusion

Private Equity is a powerful structure where LPs provide money and GPs provide expertise. Together, they create value by restructuring businesses and sharing profits. For finance aspirants, PE knowledge is crucial for careers in investment banking, fund accounting, and portfolio management.

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