What goes into private equity fund calculation?

September 27, 2023

Computing NAVs and other metrics is growing more complex as fund structures evolve. Learn what factors impact your data and reporting – and what the industry is doing to adapt.

Private equity is growing more complex every year – placing greater demands on managers and especially their back-office administrators. Service providers are being pushed to their limits in terms of what’s being asked of them, which can spell delays, inefficiencies and complications for clients.

In this article, we’ll look at why private equity funds – traditionally seen as less complicated structures – are becoming increasingly complex. And we’ll look at how future-focused industry leaders are developing and putting into place digitized solutions designed to accommodate fund complexity and process net asset values (NAVs) and other calculations for clients on demand.

“When you layer all these different elements on top of each other, you see how exponentially complex things can get in private equity under the semblance of being a much simpler structure.”

– Diego Lopez, head of vendor platforms for U.S. Bank Wealth Management and Investment Services

The evolution of the private equity structure

Historically, private equity investment took a relatively simple approach. Investors would gather capital and purchase a company. They’d eventually sell it, and the money would be returned to investors in a buyout fund. These were generally long-term, pro rata partnerships (5–7-year investments), so calculating fees and dividing earnings was clear and straightforward.

Over time, as markets became more regulated, private equity fund structures started becoming more appealing. Managers sought out innovative ways to maximize returns. And now, many funds that still fall under the purview and rules of private equity function in ways that more closely resemble hedge funds.

“We’re seeing more and more PE funds invest in marketable securities, loans – really any kind of investment they want – by using what we call a private equity wrapper,” says Diego Lopez, head of vendor platforms for U.S. Bank Wealth Management and Investment Services. “This keeps the fund structured in the private equity realm, even though its activity might not be traditional private equity activity.”

This expanse in application is similar to the way exchange-traded funds (ETFs) have also found a new role as strategy wrappers.

Layers upon layers of complexity

As managers pursue more innovative ways to use the private equity structure, other complexities come into play as well. Here are just a few:

•  Rebalancing events 

Any time new investors buy into a fund after its inception, that triggers a rebalancing event. The service provider has to calculate historic profits and losses (P&L) so that everything is correctly attributed between new and old investors.

“Sometimes there is complexity in what can and can’t be rebalanced,” says Diego. “And everything compounds even further when you have years and years’ worth of data that needs to be accommodated, rebalanced, stored and reported correctly.

•  Data management

As private equity becomes more popular, more investors are entering the space. Lawyers often draw up agreements to assign specific treatments for certain investors. Multiply those additional steps by the number of investors, and it becomes a huge amount of data to manage.

“Frankly, a lot of the calculation ends up being a very manual exercise for the administrator,” says Diego. “You’re going into the portfolio. You’re bifurcating the needs. You’re balancing this and that because the automated tools can’t really do it properly, and it becomes a very time and labor-intensive process.”

•  Carried interest

Another complexity with private equity comes in the form of carried interest, a tiered hurdle structure for calculating incentive. There are two styles of carried interest, each with its own unique nuances: hypothetical (European style) and deal-by-deal (American style). 

•  Hypothetical carried interest (European style): The investment’s value goes through a series of hurdles that allocates money and determines incentive. Generally, capital is returned. Then deferred return (interest) is allocated. Then, the general partner (GP) takes their cut. Then the remaining profits are split according to the agreement.

•  Deal-by-deal carried interest (American style): Returns are calculated on each investment, requiring much greater effort on the part of the administration team.
According to Diego: “With deal-by-deal, every equity you buy, every dividend you receive from that equity, every bond you buy, every hedge you put on, every interest payment, every paydown – everything needs to be treated in a certain manner to figure out what is eligible for incentive fees.

•  Tax calculations

Tax calculations add yet another layer of complexity. In general, private equity structures are treated as capital gains instead of ordinary income, which makes a big difference in terms of tax liability. Beyond this, experienced managers often open different entities within the same fund structure in different domiciles around the globe. This money is subject to different regulations and tax calculations, which means administrators need to be able to track all this movement in granular detail.

“When you layer all these different elements on top of each other, you see how exponentially complex things can get in private equity under the semblance of being a much simpler structure,” says Diego.

To accommodate the demands of today’s private equity investors, U.S. Bank has developed and started rolling out a home-grown, digitized, back-end technology solution designed to dramatically improve the efficiency of data storage and calculation – no matter how complex the fund. Learn more about this game changing technology enhancement and its benefits for you and your investors by following the article link below.

Read more: Accommodating the growing complexity of private equity funds

At U.S. Bank, we understand the value of partnering with a trusted third-party administrator to help you achieve your business goals, and we have the expertise and resources to support your private equity growth. To learn more about the comprehensive fund administration services offered at U.S. Bank, visit usbank.com/globalfundservices.

If you’d like more information about our PE digitization rollout, please contact our team. Additionally, be on the lookout for more information and articles on the subject throughout the year.

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LGBTQ+ adoption 101: What prospective parents should know

Legal protections for growing LGBTQ+ families

11 essential things to do before baby comes

Webinar: Uncover the cost: Starting a family

Preparing for adoption and IVF

Checklist: 10 questions to ask your home inspector

Handling the finances of someone who has died: Terms and definitions

Resources for managing financial matters after an unexpected death

What you need to know as the executor of an estate

When your spouse has passed away: A three-month financial checklist

What documents do you need after a loved one dies?

Simple steps to be ready for a natural disaster

Checklist: financial recovery after a natural disaster

How does money influence your planning?

College budgeting: When to save and splurge

U.S. Bank Student Scholarship

Student checklist: Preparing for college

Uncover the cost of a college diploma

How to save money in college: easy ways to spend less

How to gain financial independence from your parents

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

Practical money skills and financial tips for college students

How to build credit as a student

5 things to know before accepting a first job offer

How I did it: Paid off student loans

Bank Notes: College cost comparison

Four ways to make a strong resume for your first real job

Tips to earn that A+ in back-to-school savings

7 ways to teach your children to be scam-savvy

How to prevent fraud

Outsmart tax scams and keep your finances safe

Keep your finances safe and secure: Essential tips for preventing check fraud

How to avoid student loan scams

Banking basics: Avoiding fraud and scams

How to spot an online scam

What you need to know about identity theft

What is financial fraud?

5 tips for seniors to stay a step ahead of schemers

Recognize. React. Report. Don't fall victim to financial exploitation

Webinar: U.S. Bank asks: Are you safe from fraud?

Is online banking safe?

How-to guide: What to do if your identity is stolen

How you can prevent identity theft

8 tips and tricks for creating and remembering your PIN

Helping Gen Z build financial confidence

Short- and Long-Term Financial Goals for Every Life Stage

How your taxes can change after a major life event

Financial goals for 2024 a 12-month planning guide

How to save for a dream vacation

Tips for talking about money when friends earn more

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

What is a Certificate of Deposit? And what to know before opening an account

What does FDIC mean?  

3 financial tools to help automate your finances

Financial checklist: Preparing for military deployment

How to financially prepare for a military PCS

Planning self-care moments that matter (and how to finance them)

Growing your savings by going on a ‘money hunt’

Working with an accountability partner can help you reach your goals

The banking app you need as a new parent

Why a mobile banking app is a ‘must have’ for your next vacation

How to decide when to shop local and when to shop online

Your guide to starting a job: Resources to help along the way

How to set yourself up for success in your first job

5 myths about emergency funds

Financial Wellness Assessment

Does your savings plan match your lifestyle?

Mobile banking tips for smarter and safer online banking

Uncover the cost: Wedding

Uncover the cost: International trip

Are savings bonds still a thing?

Tips to overcome three common savings hurdles

Adulting 101: How to make a budget plan

Personal loans first-timer's guide: 7 questions to ask

Mindset Matters: How to practice mindful spending

How and when to ask for a raise

How to choose the right rewards credit card for you

How can I help my student manage money?

How to manage money in the military: A veteran weighs in

Things to know about the Servicemembers Civil Relief Act

You can take these 18 budgeting tips straight to the bank

3 tips for saving money easily

Save time and money with automatic bill pay

How to best handle unexpected expenses

Stay on budget — and on the go — with a mobile banking app

Do you and your fiancé have compatible financial goals?

U.S. Bank asks: Transitioning out of college life? What’s next?

U.S. Bank asks: Do you know your finances?

U.S. Bank asks: Do you know what an overdraft is?

Personal finance for teens can empower your child

How to save for a wedding

How can you pay bills online the right way?

How compound interest works

Dear Money Mentor: How do I set and track financial goals?

Lost job finance tips: What to do when you lose your job

Money Moments: 3 smart financial strategies when caring for aging parents

Money management guide to financial independence

First-timer’s guide to savings account alternatives

7 financial questions to consider when changing jobs

5 tips to use your credit card wisely and steer clear of debt

Money Moments: 3 tips for planning an extended leave of absence

Overdrafts happen: Steps to get you back on track

P2P payments make it easier to split the tab

How to stop living paycheck to paycheck post-pay increase

Practical money tips we've learned from our dads

6 ways to spring clean your finances and save money year-round

How to cut mindless spending: real tips from real people

Bank from home with these digital features

Military finance: How to create a family budget after military service

Discovering your money personality can help you save

Tips on how couples can learn to agree about money

Understanding your military GI Bill benefits

How grandparents can contribute to college funds instead of buying gifts

How to open and invest in a 529 plan

Using 529 plans for K-12 tuition

Is a home equity loan for college the right choice for your student

Parent checklist: Preparing for college

How to apply for federal student aid through the FAFSA

What to consider before taking out a student loan

Are you ready to restart your federal student loan payments?

Consolidating debts: Pros and cons to keep in mind

Managing debt

Best travel credit card perks for family vacations

5 tips to use your credit card wisely and steer clear of debt

5 steps to selecting your first credit card

How to use debt to build wealth

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Know your debt-to-income ratio

How to pay off credit card debt

Your quick guide to loans and obtaining credit

Dear Money Mentor: How do I begin paying off credit card debt?

Checklist: 10 things to look for when touring a home

How to sell and buy a home at the same time

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Home improvements with the best ROI

How we did it: Converted to solar power

PCS moving checklist for military spouses and families

Crypto + Homebuying: Impacts on the real estate market

How I did it: Bought my dream home using equity

House Hacks: How buying an investment property worked as my first home

Managing the impacts of appraisal gaps in a hot housing market

Spring cleaning checklist for your home: 5 budget-boosting tasks

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

Checklist: 6 to-dos for after a move

What are conforming loan limits and why are they increasing

Uncover the cost: Building a home

The lowdown on 6 myths about buying a home

4 ways to free up your budget (and your life) with a smaller home

Get more home for your money with these tips

Money Moments: How to finance a home addition

First-time homebuyer’s guide to getting a mortgage

Dear Money Mentor: When should I refinance a mortgage?

Beyond the mortgage: Other costs for homeowners

10 questions to ask when hiring a contractor

What is an escrow account? Do I have one?

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How does a home equity line of credit (HELOC) work?

How do I prequalify for a mortgage?

Home equity: Small ways to improve the value of your home

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

10 uses for a home equity loan

Improving your credit score: Truth and myths revealed

6 essential credit report terms to know

5 unique ways to take your credit card benefits further

How to maximize your credit card rewards

Test your loan savvy

Decoding credit: Understanding the 5 C’s

Should you give your child a college credit card?

U.S. Bank asks: What do you know about credit?

What types of credit scores qualify for a mortgage?

What is a good credit score?

Credit score help: Repairing a bad credit score

How to improve your credit score

Common questions about electric vehicles (EVs)

What to keep in mind when buying a used car from a private seller

How I decided that buying an RV was worth it for me

Take the stress out of buying your teen a car

Questions to ask before buying a car

How to choose the best car loan for you