Navigating the Complexities of Real Estate Investment Accounting

Private equity presents unique challenges for accounting systems, whether accounting for real estate or any other type of investment. Regardless of the company structure, it is required by law to keep and maintain financial records in accordance with GAAP. Accurate bookkeeping is an essential step in managing a private equity fund for financial reporting. This not only helps firms remain compliant but gives investment groups relevant insights into their equity fund, to help them make calculated investment decisions.

In basic private equity fund accounting, Capital Call/Distribution includes investor fund commitments and unfunded commitment adjustment, management fees and carried allocation, investor reallocation, and interest transfer. Accounting for private equity fund transactions from all partners must be accurately allocated with complete transparency with regard to each partner’s responsibilities and ownership. Management fees and fund expenses are not allowed in the fund allocation, while LPs pay a percentage based on ownership rights. The distribution of realized investment profits is more complex for outsourced accounting controllers to calculate than ownership calculations.

Private Equity Fund Structure and Real Estate Accounting

Private equity funds invested in real estate are frequently set up as limited partnership agreements (LPAs) with several partner classes. Founder partners (FP), general partners (GP), and limited partners (LP) are frequently present. Distributions and fund costs must be divided among these partner classes. This is governed by the terms of the limited partnership agreement (LPA), and there may be significant differences across businesses. How the accounting information for each investment and that of the company as a whole is documented can vary depending on the type of private equity fund structure. The structure may also have an impact on the depth of analysis the private equity fund uses. 

The form and accounting of private equity funds can both be affected by the country of jurisdiction. The majority of private equity funds in the United States are located in Delaware, although they can also be based abroad or offshore, like in a Cayman Limited Partnership. An English Limited Partnership, for instance, is quite popular throughout Europe, even for funds that are not based in the United Kingdom.

Different Types of Private Equity Investments

Private equity funds invest in established organizations and late-stage startups. There are several different types of private equity investments, ranging from the most common to the least common:

• Buyouts: This involves buying a company and administering an initial public offering (IPO) through debt minimization and management restructuring.
• Venture Capital: This involves investing in startups to help them further compete in a market.
• Real Estate: This involves purchasing land deals, commercial buildings, or other tangible assets on behalf of a company.
• Distressed or Vulture Financing: This involves an injection of funding with the aim of overhauling a business through a reorganization of management or consolidation/sale of assets such as real estate, patents, brands, etc.
• Hedge Funds or Mutual Funds: This involves aligning with other funds to extend portfolio income.

Unique Challenges for Private Equity Accounting Systems

Private equity accounting involves complex calculations and must address issues that basic fund or business accounting doesn’t usually have to deal with. This includes complex and error-prone fee calculations, such as waterfalls, performance measurements (e.g., IRR, TVPI, DPI, RVPI), capital calls and distributions. These calculations must be accurate and auditable. 

Funds that focus primarily on private equity often purchase front-end packages that include back-office support. However, some funds may find value in combining a back-office system with a front-end CRM system like Excel or Salesforce. This can be an attractive option for funds dealing with exotic foreign PE debt, needing waterfall calculation capability, and requiring a strong back-office system. Competitors offering deal flow can be expensive solutions, while those strong in the front office may not be as strong in the back end. This is particularly true for very complex funds, where having an agile back office can provide an edge.

Accounting for private equity fund transactions from all partners must be accurately allocated with complete transparency with regard to each partner’s responsibilities and ownership

FundCount’s Approach to Private Equity and Waterfall Calculations

FundCount takes a unique approach and provides waterfall calculation capability through its powerful custom control tool. Custom control is basically a beefed up version of Excel, which helps make for a more robust and flexible calculation capability. Data is dumped into Excel, processed, and then seamlessly imported back. Why is this important? Because waterfall calculations can have 4 or 5 different layers of highly complex calculations. Many providers just give you a black box calculation, which can be problematic when you need to go back and show your proofs, do shadow accounting, or verify. 

This means there is no need to go back and reproduce the same numbers using Excel as this is already done and readily available to you the user. Excel calculations are automatic, yet the spreadsheets are made available for the purposes of transparency. All formulas are available for proof and review and since they have all been imported, they are available for reporting too. Because excel is so customizable, there is no WF calculation it cannot handle. You can create your own data model or reproduce one of the available excel models.