Because a close that agrees with itself only one way has not been checked. It has
been computed. Those are different things, and the difference is usually discovered by an auditor
rather than by the controller.
Net asset value can be arrived at from two directions. A fund's books permit both, and a
well-built close computes both independently and then compares them.
Route
What it is
Partners' capital roll-forward
Opening capital, plus contributions, less distributions, plus the period's allocated
income and unrealised movement, allocated across the investor register.
Net assets from the balance sheet
Investments at fair value, plus cash and receivables, less payables, accrued expenses,
accrued carried interest and any borrowings.
The two must produce the same figure. They are built from different records, by different
processes, and they touch different controls. When they agree, the close has been verified. When
they disagree, the difference is the finding, and the size of it tells you where to look.
What a real quarter looks like
It is 30 September. The administrator's draft trial balance has arrived. Five things are wrong
with it. Working the corrections through, the bridge runs from a draft partners' capital of
$125m to a corrected net asset value of $128.5m — and the
balance sheet route, computed independently, agrees at $128.5m.
Three and a half million on a $125m fund is 2.8 percent of net asset value. It is well
inside the range that would not be visible in a variance review, and well outside the range that
anyone would accept in a statement sent to investors.
The finding that matters is not the $3.5m. It is that none of the
five errors was a modelling mistake. Every one of them came from a control that did not exist. And
every one was found the same way: by connecting two records that should have agreed, and noticing
that they did not.
The reconciliations that catch these
Three ties do most of the work in a private fund close. Each one connects two independently
maintained records, which is exactly why each one catches errors that a single-route computation
cannot.
1. Investor subledger to net asset value
The sum of every investor's capital account must equal the fund's net assets. This is the tie
that stops a bad quarter becoming a restatement, because it is the one that catches allocation
errors — income allocated on the wrong participation percentages, a late-closing investor
not equalised, a transfer recorded on one side only. The fund total can be perfectly correct while
the split across investors is wrong, and only this tie sees it.
2. Investment schedule to the general ledger
Cost and fair value per the investment schedule must agree to the ledger balances. This catches
valuations approved by the valuation committee but never posted, and posted movements that no
longer match an approved valuation.
3. Cash to the bank, and to the calls and distributions
Bank balances reconcile to the ledger, and every call and distribution ties to what actually
moved. This catches capital called at the wrong participation, expenses paid out of the fund that
belong to the manager, and recallable distributions treated as ordinary ones.
Why the accrued items are where errors live
The balance sheet route depends on accruals, and accruals are estimates that someone has to
remember to make. Three recur:
Management fee. The basis changes at the end of the investment period on
most funds — from committed capital to invested cost, or to net asset value. The quarter
in which that switch happens is the quarter it gets missed.
Accrued carried interest. A liability that only exists if the waterfall
would pay it on a hypothetical liquidation at current values. It has to be recomputed every
quarter, from the waterfall, on the current NAV — not rolled forward.
Fund expenses. Audit, legal, administration and organisational costs
accrued in the period they relate to rather than the period they are invoiced in.
The discipline, stated plainly
Build the close so that both routes are computed from their own sources, in the same file, and
have the file say out loud whether they agree. Not a cell you have to interpret — a stated
result. Then make every correction an input you can set to zero, so that the effect of any single
adjustment on the final number can be seen by turning it off.
Two routes to the same number is not redundancy. It is the control. It is also the cheapest one
available, because both figures already exist in the books; the only work is refusing to accept
the first one on its own.
The workbooks behind this article
Every figure above is a live formula in the companion files for
The Private Equity Fund Controller Playbook. Change one input and the rest of the sheet answers.
They are free, and they need no account and no email address.
Should corporate debt be fixed or floating?78.1818 per cent of gross debt fixed, and a net floating exposure after cash of -608,000.00 — the proportion, not the instrument.
Does an undrawn revolver count as liquidity?67.4567 per cent of the headroom, and it leaves at a fall in annual revenue of 8.4127 per cent — not the 13.3333 per cent the board deck implies.
Does supply chain finance count as debt?66,049,315 released, and leverage of 2.7622× or 3.1362× depending on which balance the test is asked of — the second is a breach at today's EBITDA.
How do you set a minimum cash balance?Three components, 124,596,281 in total — and the double count that turns a margin of 27,403,719 into an apparent shortfall of -3,988,281.
Is a 2/10 net 60 discount worth taking?An annualised 14.8980 per cent against a revolver at 4.50 per cent — worth 5,471,890 a year, and 0.3132 turns of reported leverage.
At what wealth does a family office pay?A five-person office costs the same $2,442,000 at $100m as at $2bn. Against a tiered multi-family schedule the two curves cross exactly once.
Does the fulcrum move with enterprise value?A worked capital structure at three enterprise values. The break migrates from the first lien to the subordinated notes without a single document changing.
How many companies does a reserve pool defend?Holding pro rata to the Series D costs $14.76m per company. A $40m reserve defends 2.71 of forty — and 61 per cent of the cost is the last round.
How much room a 1.15x downside actually leaves79 basis points of margin. The leverage covenant fails first, five basis points before the coverage covenant the chapter reports on, and 4.6 per cent of EBITDA is the whole cushion.
How the GP catch-up is actually solvedMost write-ups state the catch-up formula then hardcode the answer. Set it as a solve and it moves on its own when the carry rate does.
Six ways to state the same fund's return7.12 per cent, 18.04 per cent, or 1.323 times the public market — one fund, one set of flows. The eleven-point gap is the valuation, and it is not cash.
The IRR at which a closed-ended fund merely tiesA drawdown fund advertising 13.25 per cent ties an evergreen netting 8.64. On committed rather than called capital, 78.7 per cent of the edge vanishes.
The month a remediation trigger has to be armed byMonth 8, on a one-year window and a 14-week hiring lead time. The date is 12W − L/4.33 and holds for any portfolio size — the book only changes the euros.
What a CBAM certificate buffer costs to holdCarry and protection are both linear in the buffer, so the break-even probability is identical at 5 per cent and at 30 — and 2027 costs exactly twice 2026.
What a clawback actually collateralises24 million recovers 13.20 net of tax and 7.20 is escrowed. The rule is e ≥ 1 − t, and every euro won on the tax clause lands uncollateralised.
What a co-investment programme actually saves37 basis points, and a 22.8 per cent total-loss rate erases it. At the usual per-deal cap a single failure is 37 per cent of the annual cohort.
What a diligence exercise actually recoversEighteen basis points is only the part that reaches the yield. Three of the four instruments never do, and the exercise is worth thirty-one.
What a follow-on reserve is actually worth0.019 turns under plain dilution, 0.285 under pay-to-play. The optimum is a property of the shareholders’ agreement, not of the portfolio.
What a lease mark-to-market is actually worth5,788,000 becomes 807,365 once the over-market stream, the expiry dates and the cost of re-letting are priced — and nothing at all below a 43.7 per cent renewal rate.
What a minimum payment actually does£81.53 leaves the account and £20.46 reaches the debt. On minimums alone the set clears in 258 months and repays 1.78 times what was borrowed.
What a month of delay costs in an enforcement463,000 euros of present value a month. No single error about enforcement, and no pair of errors, moves the indifference point from 58.7 cents to the 72 on the table.
What a pro rata cheque actually costsDefending costs 1.25 times the initial cheque across two rounds, not more in each — and below a 521 exit the follow-on dollars come back worth less than they cost.
What a subscription line does to the IRR20 per cent becomes 38.41 on the same asset while the multiple falls. Two dollars of interest buys 18.4 points, and the longer the line runs the cheaper each point gets.
What one point of fees actually costsOne point on the annual charge turns 738,846 into 567,961 over forty years — 23 per cent of the pot, and 2.43 of wealth lost per 1 of fee.
When the promote stops clearingCarried interest is not proportional to performance near the hurdle. It is a step function, and $2m of headroom is what stands between a promote and none.
Why a secondaries bid-ask gap has no zoneThe seller’s floor and the buyer’s ceiling are one formula at two rates. At equal required returns the zone is exactly zero — here it is 11.02 points apart.
Why refining a due diligence rubric makes it weakerThree of twelve managers carry a terminal flaw and the average approves all three. Splitting eight domains into sixteen makes it easier to hide, not harder.
This note is drawn from The Private Equity Fund Controller Playbook. The book is on Amazon.
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