Private Equity Funds

PE funds, as well as some hedge funds, own a unique quoting technique.

The funds are not quoted based on units or nominal with a price, but rather based on committed / paid up capital and market value.

a) Units and Prices

Since there is no unit of holding we treat the <committed amount> as the Quantity and backsolve the <price> so that the market value ties out.
This allows us to hold a quantity and a price for an item that does not provide these.

b) Redemptions and Distributions

PE funds commonly do not define which part of a payout is a capital redemption and which part is an interest or dividend component (since there is no unit holding in the first place).
As such, we tag all payouts as Distribution.

This allows us to capture the payment related to the security and will provide for an accurate profit calculation.
This also does not impact the unit of holdings as, for example, a sale would.

Distributions are counted as profit.
Usually, the amount that is paid out as a distribution is offset by an equivalent drop in the remaining market value of the fund - unless other fund assets have been substantially remarked.
Example: Client has a 1m commitment to a PE Fund with market value 750k, the client receives a distribution of 250k and the new market value is (near) 500k.
The Distribution is a profit and the market value change is a loss, so the overall profit of the fund has not changed.
The quantity that the user holds still shows as 1m since that was the committed amount.

c) Contributions

The category contribution functions in a similar way to a distribution, just in the opposite direction.
This means we can attribute the payment to correct security such that the profit will be accurate, while at the same time not impacting the quantity of the holding.

Example: Client has a 1m commitment to a PE Fund with market value 500k, the client pays in an additional 250k and the new market value is 750k.
The Contribution is a loss (since it is money spent) and the market value change is a gain, so the overall profit of the fund has not changed.
The quantity that the user holds still shows as 1m since that was the committed amount.

d) Set up and Purchases

For existing accounts in our system that see a new investment in a PE fund, we would use transaction type <Purchase> to generate the holdings.
The Quantity used in the purchase is equal to the committed amount and the cash account is reduced by the settlement amount.

For any initial setup that we do for user accounts, we use the transaction type <TransferFOP> to generate all opening holdings.
This transaction type is different from Purchase in that it does not impact cash.
Practically, it is the same as a <Purchase> transaction in combination with a <Money In> transaction to offset the cash impact.
For all securities, we are still recording the purchase price while using TransferFOP for the purposes of tracking the profitability of a transaction.

Due to this treatment, prices are always back-solved to match the provided market value and are not necessarily an indicator of the performance of the fund.