The statement of changes in net assets, with its two partner columns, worked line by line on an illustrative buyout fund.
A fund's result is allocated in two layers. The result before carried interest is shared by capital, so a general partner holding 2 per cent of the fund takes 2 per cent of it; the carried interest accrual is then charged to the limited partners alone, because the GP pays no carry on its own money. In an illustrative fund with a 13,600 result before carry, the GP column receives 272 and the LPs 10,478 after a 2,850 carry accrual, so the GP's total economics are 3,122, 22.96 per cent of the year, and its share of net assets drifts from 2.00 to 2.02 per cent.
Worked in full in How to Read a Private Fund's Financial Statements by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The statement of changes in net assets, with its two partner columns, is where this shows. It is the most useful page in a fund's accounts and the one most readers skip.
| Line | General partner | Limited partners | Total |
|---|---|---|---|
| Net assets at the beginning of the year | 5,434 | 266,266 | 271,700 |
| Result before carried interest | 272 | 13,328 | 13,600 |
| Carried interest accrual | 0 | -2,850 | -2,850 |
| Net increase from operations | 272 | 10,478 | 10,750 |
| Capital contributions | 800 | 39,200 | 40,000 |
| Distributions | -900 | -44,100 | -45,000 |
| Net assets at the end of the year | 5,606 | 271,844 | 277,450 |
GP share of the result before carry = result before carry × GP capital share
LP net increase = result before carry × (1 − GP share) − carry accrual
GP economics for the year = GP share of the result + carry accrual
In Excel, with the result in B1, the GP share in B2 and the accrual in B3: GP =B1*B2, LPs =B1*(1-B2)-B3, GP economics =B1*B2+B3.
Step 1, the GP's capital share. Opening GP net assets of 5,434 over 271,700 is 2.00 per cent, the GP's commitment share. Contributions and distributions follow it: 800 of 40,000 and 900 of 45,000.
Step 2, the result before carry. 13,600 at 2 per cent is 272 for the GP and 13,328 for the LPs. Both columns earn 5.01 per cent on their opening balances at this stage.
Step 3, the carry. The accrual of 2,850 comes out of the LP column only. The LPs' net increase is 10,478, 3.94 per cent on their opening capital, while the GP column keeps 5.01. The carry is 20.96 per cent of the total result and 21.38 per cent of the LPs' share of it: more than a flat 20 per cent, because the accrual is the change in a hypothetical liquidation through the waterfall, not 20 per cent of the year (the mechanics are in how to calculate accrued carried interest).
Step 4, the drift. Closing GP net assets of 5,606 over 277,450 is 2.02 per cent. Every year the fund makes money above its hurdle, the GP column grows faster than the LP column, and the drift compounds over a successful fund's life. A GP percentage that does not drift upward in a profitable year is a reason to ask how the allocation was done.
Harbourgate books its cumulative accrued carry, 12,930, as a liability, so net assets of 277,450 are already net of the manager's entitlement. Many funds instead present the accrual as a reallocation of capital from the LP accounts to the GP account. The LP column is the same either way; the totals are not.
| Presentation | Net assets | GP capital | GP share |
|---|---|---|---|
| Carry as a liability (Harbourgate) | 277,450 | 5,606 | 2.02% |
| Carry as a reallocation to the GP | 290,380 | 18,536 | 6.38% |
Two funds with identical portfolios can report net assets 4.66 per cent apart on presentation alone. Before comparing NAVs, concentration percentages or expense ratios across funds, check which line the carry sits on.
| Variant | GP share of result | GP economics | % of the result | GP share, closing |
|---|---|---|---|---|
| 1% GP commitment | 136.0 | 2,986.0 | 21.96% | 1.010% |
| 2% (Harbourgate) | 272.0 | 3,122.0 | 22.96% | 2.021% |
| 2%, management fee waived on the GP | 345.6 | 3,195.6 | 23.37% | 2.047% |
| 5% GP commitment | 680.0 | 3,530.0 | 25.96% | 5.051% |
The third row is a second asymmetry many agreements contain: no management fee on the GP's own commitment. Here the fee is 3,680, so waiving the 2 per cent of it that falls on the GP's commitment adds 73.6 to the GP column and to the fund's result, while the LP column, which still pays its full share, does not move. Small in one year, but it means the GP's capital share should not be applied to the result after fees without checking the agreement.
Share the result before carry by capital, charge the carry to the LPs alone, and expect the GP's percentage to drift up when the fund performs: 272 and 10,478 here, with 3,122 of total GP economics. For your own account, the same split is done line by line in how to reconcile a capital account, and the full pack, both partner columns live, is in the free workbook for this case.
No. The carry accrual is charged to the limited partners' column only. In the illustrative fund the GP's 2 per cent share of a 13,600 result before carry is 272 and stays 272, while the LPs' 13,328 is reduced by the 2,850 accrual to 10,478. That is why the GP earns 5.01 per cent on its opening capital and the LPs 3.94.
Because it keeps its full share of the gains while the LPs bear the carry. In the example the GP column moves from 2.00 per cent of net assets to 2.02 per cent in one profitable year. Over a successful fund's life the drift compounds; in a loss-making year with a carry reversal it runs the other way.
It depends on the fund's presentation. Some funds book it as a liability, so net assets are net of it; others reallocate it from LP to GP capital. The same illustrative fund shows net assets of 277,450 with 12,930 of carry as a liability and 290,380 as a reallocation, a 4.66 per cent difference with identical LP balances.
This article is one calculation from How to Read a Private Fund's Financial Statements. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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