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Private Equity Accounting, Investor Reporting, and Beyond

Book Description

Today's only advanced comprehensive guide to private equity accounting, investor reporting, valuations and performance measurement provides a complete update to reflect the latest standards and best practices, as well as the author's unique experience teaching hundreds of fund professionals. In Private Equity Accounting, Investor Reporting and Beyond  Mariya Stefanova brings together comprehensive advanced accounting guidance and advice for all private equity practitioners and fund accountants worldwide: information once available only by learning from peers.

Replete with up-to-date, user-friendly examples from all main jurisdictions, this guide explains the precise workings and lifecycles of private equity funds; reviews commercial terms; evaluates structures and tax treatments; shows how to read Limited Partnership Agreements; presents best-practice details and processes, and identifies costly pitfalls to avoid.

Table of Contents

  1. About This eBook
  2. Title Page
  3. Copyright Page
  4. Dedication Page
  5. Contents-at-a-Glance
  6. Contents
  7. Acknowledgments
  8. About the Author
  9. Part I: Private Equity Accounting, Investor Reporting, and Beyond
    1. 1. Private Equity Structures and Their Impact on Private Equity Accounting and Reporting
      1. Structuring Considerations in Private Equity
      2. Main Building Blocks and Vehicles of a PE Structure
        1. Domiciliation: Where to Form the Fund—Onshore or Offshore?
        2. Simple or Complex?
      3. Using a Combination of Vehicles
        1. Master-Feeder Funds
        2. Structures Involving Blockers
        3. Parallel Structures
        4. Master-Feeder or Parallel Structure?
      4. Alternative Private Equity Structures
      5. Summary
    2. 2. The Importance of Allocations and Allocation Rules
      1. Introduction: Why Start with Allocations and Allocation Rules?
      2. What Is an Allocation Rule, and Why Is It So Important in Private Equity Accounting?
        1. Types of Allocation Rules
      3. Why Are Different Allocation Rules Used? Is Excel-Based Accounting Adequate?
      4. How Do Inaccurate Allocations Affect Investors?
      5. How Can You Identify the Allocation Rules in an LPA?
      6. What Do You Do If the Allocation Rules Stipulated in the LPA Are Flawed?
      7. What Is the Best Way of Doing Allocations?
        1. A Word of Caution for LPs
      8. Summary
        1. Last Advice for LPs
        2. Last Advice for GPs
    3. 3. Private Equity Accounting Processes: Some Neglected Processes That Could Expose GPs
      1. Introduction
      2. Some Neglected Private Equity Accounting Processes
        1. Rebalancing
        2. Partner Transfers/Assignments
      3. Summary
    4. 4. Investor Reporting: ILPA versus IPEV IRG
      1. Introduction
      2. Existing Accounting Frameworks and GAAPs Used in Private Equity
      3. What Is Investor Reporting?
      4. Existing Reporting Framework
      5. Comparisons among ILPA, IPEV, and EVCA Reporting Guidelines
      6. Transition from EVCA RG and Other Local Reporting Guidelines to IPEV IRG
      7. ILPA or IPEV IRG Compliant?
      8. Summary
      9. Endnotes
    5. 5. ESG Reporting and Responsible Investing
      1. Introduction
      2. Why ESG and RI?
      3. Potential Material Impacts of ESG Factors and Value Creation
      4. What Are the Implementation Challenges?
      5. Some ESG Issues
      6. Sample Procedure for RI and ESG Implementation
        1. Stage 1: Developing an RI Policy
        2. Stage 2: Identifying Specific ESG Factors and Risks
        3. Stage 3: Implementing ESG Objectives and Putting ESG Systems and Processes in Place
        4. Stage 4: Assessing Existing Portfolio Companies for ESG Factors and Identifying ESG Factors and Risks
        5. Stage 5: Integrating ESG Management into the Future PE Investment Process: Brief Study on KKR’s RI and ESG Management
        6. Stage 6: Implementing Specific ESG Programs for Each Portfolio Company
        7. Stage 7: Set Key Performance Indicators (KPIs) and Start Measuring against Them
        8. Stage 8: ESG Reporting
      7. Summary
    6. 6. Private Equity Valuation: Taking Valuation to a Level Higher
      1. Why Fair Value? A Fair Value History Lesson
      2. Valuation Guidelines
      3. Fair Value Accounting Standards
      4. Basic Private Equity Valuation Concepts
        1. Basic Facts
        2. Calibration
      5. Determining Enterprise Value at a Future Valuation Date
        1. Market Approach
        2. Income Approach
      6. Levels 1, 2, and 3
      7. Selected Private Equity Valuation Nuances
        1. Marketability
        2. Unit of Account
        3. Valuing Noncontrolling Interest
      8. Valuing Investments in Private, Nontraded Debt
      9. Valuing Fund Interests
        1. Background
      10. The Future of PE Valuation
      11. About the Author
      12. Endnotes
    7. 7. Performance Measurement: IRRs, Multiples, and Beyond
      1. Introduction
      2. Traditional Performance Measurement in Private Equity—What Is the Status Quo?
      3. What Is IRR?
      4. Why IRR Is a Preferred Performance Measure in PE
      5. IRR Calculation: What Do We Need to Calculate It?
        1. Manual IRR Calculation
        2. Using a Computer to Calculate IRR
      6. The Difference between IRR and XIRR in Excel
      7. The Guess: Do We Really Need It?
      8. Pitfalls of Using IRR
      9. Other Pitfalls
      10. Levels and Types of IRRs Advocated by Professional Bodies—Gross and Net IRR and Multiples
      11. Gross IRR and Gross Multiples
      12. Net IRR
      13. Don’t Forget to Strip Out Carried Interest!
      14. Money/Net Multiples to Investors
      15. Alternative Performance Metrics
      16. Time-Weighted Rate of Return (TWR): Is It an Appropriate Metric for Measuring Performance in PE?
      17. Modified IRR (MIRR)
      18. Benchmarking PE Performance to Public Market Returns
      19. Public Market Equivalent (PME)
      20. Other Alternative Performance Metrics
      21. Summary
    8. 8. Carried Interest and Carried Interest Modelling
      1. Why “Carried Interest”?
        1. Substance of Carried Interest
        2. Carry Participants
        3. What Is a Waterfall?
        4. Dual Nature of Carry
        5. Cumulative Basis of Calculation
        6. Types of Carried Interest Models/Arrangements
        7. Mechanics of Pure Deal-by-Deal Carried Interest Model
        8. Mechanics of Whole-of-Fund/Whole-Fund/All-Contributions-First European-Style Carry Model and the Cumulative Cash Bucket Concept
        9. Preferred Return
        10. Hybrid Models
      2. Clawback: What Is It, and Should We Recognize It in the Financial Statements?
        1. Accounting for Carried Interest
        2. Notes on Carry to the Limited Partners
      3. Summary
    9. 9. Consolidated Financial Statements
      1. Background
      2. Introduction: Basis for Consolidation
      3. Does a Fund Need to Consolidate Portfolio Investments That It Controls?
      4. The Investment Entity Exemption
      5. Do Any of the Changes Impact the Issue of Consolidation of the Fund?
      6. Control
      7. Purpose and Design
      8. Relevant Activities
        1. Identification
        2. How Decisions Are Made
      9. Power
        1. Substantive Rights That Give an Investor the Right to Direct the Relevant Activities of the Investee
        2. Practical Ability
        3. Other Indicators
        4. Voting Rights
      10. Protective and Veto Rights
      11. Variable Returns
      12. Principal versus Agent: A Link between Power and Variable Returns
      13. De Facto Agents
      14. Putting the Consolidation Issue All Together
      15. Other Frequently Asked Questions
        1. What about the Consolidation of Master-Feeder Fund Structures?
        2. What about the Consolidation of Funds of Funds?
        3. Are Tax Blockers Treated the Same?
        4. So Are There Any Other GAAP Options?
      16. About the Author
    10. 10. Technology in Private Equity
      1. Introduction
      2. Technology for General Partners
        1. What Are the Options?
        2. What Are the Pros and Cons of Having a Specialist PE System?
        3. Beware the Pitfalls of Implementation
        4. What Should a Good Comprehensive Specialist PE Platform Have?
        5. Benefits from Having a Specialist PE System for Your Back Office, Middle Office, and Front Office
      3. Technology for Limited Partners
        1. Some Features LPs Should Expect from a Specialist System
      4. Summary
  10. Part II: Accounting for Different Types of Funds: Beyond Traditional Private Equity Fund Accounting
    1. 11. The Limited Partner’s and Fund-of-Fund’s Perspective on Private Equity Accounting, Reporting, and Performance Measurement
      1. Difference in the Legal Structure of FoFs Compared to Traditional PE Funds
      2. Legal Personality: Should an FoF Have One?
      3. Some Reporting Challenges for More Complex LP/FoF Structures
        1. Reporting for Master-Feeder Structures
        2. Reporting for Parallel Structures
      4. Some Accounting-, Reporting- and Performance Measurement–Related Challenges for LPs and FoFs
        1. Carried Interest: What Should LPs Do When Investee Funds Do Not Report Interim Carry Accruals
        2. Impact of Bridged Investments (“Quick Flip”) on Preferred Return
        3. Impact of the Priority Profit Share (PPS) on the LP’s Capital Account
        4. Treatment of Management Fees and Fund/Partnership Expenses Paid to Investee Funds
        5. Management Fees and Fund/Partnership Expenses Called before Year-End but Due in the Next Accounting Period
        6. Treatment of Deal Expenses Associated with Acquiring a Fund Investment as of the Year-End
        7. Carried Interest Charged by Carried Interest Partner of Investee Funds
        8. Administration, Tracking, and Treatment of Drawdowns and Distributions
      5. Recapitalizations
        1. Accounting Treatment of Recaps
        2. Treatment of Distributions from Dividend Recaps at the LP Level
      6. Performance Measurement
        1. Impact of Recapitalizations on Performance
        2. Impact of Netting Off Drawdowns against Distributions on Performance
        3. Impact of Temporary Distributions on Performance
        4. Stripping Out Carried Interest for the Purposes of IRR Calculation
      7. Challenges Associated with Secondary Investments
      8. Summary
    2. 12. Real Estate Funds
      1. Introduction
      2. Key Real Estate Accounting Requirements and Options
        1. Investment Property, or Property, Plant and Equipment (PP&E)?
        2. Asset Revaluations
        3. Rental Income
        4. Service Charges
        5. Lease Structures
        6. Managing Agents and Advisers
      3. Mind the GAAP
        1. What Different Frameworks Are There?
        2. Which One Should I Use?
        3. How Are They Different?
        4. Some Tax Considerations
      4. Other Common Accounting Mistakes
        1. Stripping Out Lease Incentives from Valuations
        2. Grossing Up of Head Lease Liabilities
        3. Bad Debt Expense Presentation
        4. Service Charge Recording and Monitoring
      5. Summary
      6. About the Author
    3. 13. Infrastructure Funds
      1. Introduction
        1. Investor Base
        2. Assets Held
        3. Exit Routes
      2. Structure of Infrastructure Funds
        1. Closed-Ended vs. Open-Ended
        2. Unlisted vs. Listed Infrastructure Funds
        3. Fee Structures
      3. Market Trends
        1. Infrastructure Funds and the Wider Economy
        2. Future of the Industry
        3. Role of Infrastructure Debt Funds
        4. Public-Private Partnerships and Private Finance Initiatives
      4. Accounting for Infrastructure Funds
        1. Reporting under IFRS
        2. Consolidating Investments
        3. Consolidation and the Investment Entity Exemption
        4. Application of the Investment Entity Exemption to Infrastructure Funds
        5. Investment Strategy
        6. Service Concession Arrangements
        7. Divergence between IFRS and U.S. GAAP
        8. Investment Company Exemption
        9. Nonstatutory Financial Statements
      5. Investment Valuations
        1. Performance Measurement for IFs
      6. Summary
      7. About the Authors
    4. 14. Private Debt Funds
      1. Debt Funds in General
      2. How Debt Funds Differ from Private Equity Funds
      3. Liquidity, Risks, and Rewards Associated with Differing Debt Instruments
        1. Secured or Unsecured
        2. Senior Debt
        3. Mezzanine Debt
        4. Corporate Bonds
        5. Asset-Backed Securities
        6. Infrastructure Debt
        7. High-Yield Securities
        8. Distressed Debt
      4. How Are Debt Funds Structured?
      5. Debt Funds and Financial Reporting
      6. Using IFRS or U.S. GAAP As a Debt Fund’s Financial Reporting Basis
        1. U.S. GAAP
        2. IFRS
        3. Differences between IFRS and U.S. GAAP
      7. Measuring Debt Instruments at Fair Value
      8. Measuring Debt Instruments at Amortized Cost
      9. Challenges
      10. Summary
      11. About the Authors
      12. Endnotes
    5. 15. Mezzanine Debt Private Equity Funds
      1. Introduction
      2. What Is Mezzanine Debt?
        1. Why Mezzanine?
        2. Main Uses of Mezzanine
        3. Key Features of Mezzanine Debt
      3. European and U.S. Mezzanine Debt: Similarities and Differences
      4. Rise of Mezzanine Debt within Private Equity
        1. Structuring of a Mezzanine Fund
      5. Accounting for Mezzanine Instruments
        1. Investment Instruments
        2. Payment in Kind (PIK) Notes
        3. Arrangement Fee
        4. Warrants
      6. Accounting for Financial Assets
        1. Accounting under IFRS
      7. Challenges to Applying the Business Model Test
        1. Arrangement Costs
        2. Interaction between the Investment Entity Exemption and IFRS 9
        3. U.S. GAAP Considerations
      8. Valuation of Mezzanine Loans for PE Houses
      9. Unit of Account for Mezzanine Instruments
      10. Summary
      11. About the Authors
      12. Endnotes
  11. Index
  12. FT Press