The one page that shows deployment, facility use and where distributions came from, worked line by line on an illustrative buyout fund.
A private fund's statement of cash flows starts from the net increase in net assets from operations and strips out everything that is not operating cash as such: realised and unrealised gains (the cash from exits is shown gross, in proceeds), the carry accrual, working capital. Purchases and sales of investments sit inside operating activities, because investing is the fund's business. In an illustrative fund reporting a 10,750 result, operating cash is 10,625, but only because it sold 13,800 more than it bought; before the portfolio, the fund consumed 3,175 of cash, and 16,800 of the year's result, 123.5 per cent of it before carry, came from investment gains rather than income.
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 is usually skipped as mechanical. It is the only page in the pack that shows whether the fund is deploying or harvesting, how hard the subscription facility is working, and whether distributions came from exits or from investors' own calls.
| Operating activities | Amount |
|---|---|
| Net increase in net assets from operations | 10,750 |
| Purchases of investments | -38,500 |
| Proceeds from sales and repayments | 52,300 |
| Less net realised gain (already in proceeds) | -21,400 |
| Add back net change in unrealised depreciation | 4,600 |
| Increase in receivables and other assets | -140 |
| Increase in accrued expenses and payables | 165 |
| Increase in accrued carried interest | 2,850 |
| Net cash from operating activities | 10,625 |
| Financing activities | |
| Capital contributions received | 40,000 |
| Distributions paid | -45,000 |
| Drawdown on subscription facility | 6,000 |
| Repayment of subscription facility | -9,000 |
| Net cash used in financing activities | -8,000 |
| Net increase in cash (6,825 opening, 9,450 closing) | 2,625 |
Operating cash = net increase from operations − purchases + proceeds − realised gain − change in unrealised ± working capital + increase in accrued carry
Cash before the portfolio = operating cash − (proceeds − purchases)
Gain share of the result = (realised + change in unrealised) ÷ result before carry
Step 1, tie it. 10,625 from operations less 8,000 used in financing is 2,625; 6,825 of opening cash plus 2,625 is 9,450, the balance sheet figure. If it does not tie, stop: nothing else on the page can be trusted.
Step 2, split the operating line. Proceeds of 52,300 against purchases of 38,500 make the fund a net seller by 13,800. Take that out of 10,625 and the rest of the operating line is minus 3,175: the net investment loss of 3,200 plus 25 of working capital. That is the fund's running cost in cash, and it is the figure a reader should compare from year to year.
Step 3, measure what came from gains. The realised gain of 21,400 and the unrealised change of minus 4,600 together take 16,800 out of the result. Against a result before carry of 13,600 that is 123.5 per cent: gains carried the whole year, and income did not cover costs. Only the realised part has cash behind it, and that cash is already in the 52,300 of proceeds; the gain itself is the accounting difference from cost. The minus 4,600 is pure valuation.
Step 4, read the financing. The facility was drawn 6,000 and repaid 9,000: 15,000 of gross activity against a closing balance of 6,000, so it is in continuous working use, not idle. Contributions of 40,000 are close to purchases of 38,500, so investors funded the new deals; distributions of 45,000 were met from exits, since proceeds less the cash cost of running the fund give 49,125, 109.2 per cent of what was paid out.
Hold the accounting result and the running costs constant and change only the deal flow. The operating line swings with the fund's phase, not its performance.
| Phase | Purchases | Proceeds | Operating cash | % of net increase |
|---|---|---|---|---|
| Deploying | 60,000 | 20,000 | -43,175 | -402 |
| Balanced | 40,000 | 40,000 | -3,175 | -30 |
| Harvesting (this fund) | 38,500 | 52,300 | 10,625 | 99 |
| Late harvest | 5,000 | 70,000 | 61,825 | 575 |
A negative operating cash flow is normal for a fund in its investment period and says nothing about returns. Watch instead for the crossover, the first year proceeds exceed purchases: in this pack it is visible here years before any commentary calls the fund mature.
Not every fund presents this statement. Under US GAAP an investment company is exempt only if, among other conditions, substantially all its investments are highly liquid and carried at fair value and it has little or no debt, which is why most private equity funds present one and many hedge funds do not. Where it is missing, rebuild the two numbers that matter, net deployment and cash running cost, from the schedule of investments and the statement of operations.
Tie the cash to the balance sheet, split operating cash into net deployment and running cost, and measure how much of the result came from gains. On this fund: a net seller by 13,800, 3,175 of cash running cost, and 16,800 of the result from gains rather than income. The same pack, with every line live and the twelve reconciliations, is in the free workbook for this case, and the companion piece on why a fund reports a net investment loss explains the 3,200.
Because buying and selling investments is the fund's operating business, investment companies classify those flows as operating, not investing. In the illustrative fund, 38,500 of purchases and 52,300 of proceeds both sit in the operating section, which is why operating cash of 10,625 reflects the fund's phase as a net seller by 13,800 rather than its earnings.
Yes, and in the investment period it usually is. Holding the same 10,750 accounting result and running costs, a fund buying 60,000 and selling 20,000 shows operating cash of minus 43,175. The sign tells you whether the fund is deploying or harvesting, not whether its valuations rose.
Compare distributions with portfolio cash: proceeds less the cash cost of running the fund. In the example, 52,300 of proceeds less 3,175 of running costs gives 49,125, 109.2 per cent of the 45,000 distributed, while contributions of 40,000 roughly matched purchases of 38,500. The exits funded the distributions; investors funded the new deals.
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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