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Top 5 Things to Consider When Managing Private Equity Investments

Private Equity Investments, Private Equity Investing, Investing in Private Equities, Private equity taxation, Valuation methods

Private Equity Investing

Are you a manager of a private equity fund and confront problems in the accounting side? The accounting of funds is different from other types of investment vehicles due to their unique features. If you have no accounting experience, you can hire a provider of private equity accounting services to help you.

What is Private Equity Investing?

Private equity companies raise money from accredited investors and institutional investors with long holding periods. The pooled funds are then used for business purposes like buying distressed companies, financing new technology projects, and additional working capital. When the acquired firms become profitable, they are then sold at a much higher price. Private equity companies also earn revenues through management fees.

Different Types of Private Equity Funding

Private equity companies invest their funds in various kinds of assets to gain profits. Here are some examples of private equity funding:

  • Leveraged buyouts – This type of financing works by acquiring a company to improve its operations and profitability. After the firm becomes profitable, it is then sold to interested buyers or turned into a public company through an initial public offering (IPO).
  • Vulture financing – Also called distressed funding, it involves investments in struggling firms with underperforming assets or business segments. The purpose is to improve their operations and then re-sell them for profits. Other strategies include the sale of the acquired firms’ assets like machinery and real estate for monetary gain.
  • Venture capital – Under this type, angel investors offer capital or seed financing to entrepreneurs to launch and expand their businesses. The private equity firms achieve profits by charging a performance fee.
  • Fund of funds – In this type, private equity companies invest their money in other funds, particularly hedge funds and mutual funds.
  • Real estate private equity – This type of funding usually invests in real estate investment trusts (REIT) and commercial real estate. Based on a study by research company Preqin, private equity real estate funds will post a 50% growth by 2023 to achieve a market size of $1.2 trillion.

Things to Consider in Private Equity Fund Management

As a fund manager, there are several things to take into consideration to manage your investments successfully. Here are some of them:

  • Fund structure – The standard structure of private equity funds is limited partnership agreements (LPA) with several partner classes, namely, general partner, founder partner, and limited partner. The fund structure affects the recording of accounting information for each investment.
  • Private equity taxation – Because the funds use complex investment structures to minimize the tax burdens, it also complicates the accounting process. If the funds are invested as equity and debt, the interest payments and dividends should also be taken into account.
  • Accounting standards – Private equity firms should follow the rules from the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB). To ensure compliance with these standards, it’s best to hire a provider that offers private equity accounting services.
  • Valuation methods – In private equity accounting, valuation is an essential component. The fair value of an investment will depend on the accounting standard used.
  • Financial statements Financial statements for private equity investors depend on the accounting standard used. In the U.S., the framework used is the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide.

Managing a private equity fund is a complex process. Seek the services of competent professionals to help in the efficient management of your fund.

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