A capital account statement is the one page an investor receives about its own money, and it can be rebuilt line by line from the fund's statements and a side letter.
Start from last year's closing balance, add your own contributions and subtract your own distributions from your bank records, then apply your share of each income, gain and carry line in the fund's statement of changes in net assets, and finally layer on the terms that apply only to you. On an illustrative 5.00 per cent interest the pro rata roll-forward gives 15,760,000, a 25 per cent fee discount net of carry lifts it to 15,820,000, and the statement reports 15,842,500, leaving 22,500 that nobody has explained. That residual, not the balance, is the output of the exercise.
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 capital account statement is usually read for one number, the closing balance, and filed. It is the only page in the reporting pack that is specifically about the investor's own money, and it is built by the administrator from allocations nobody outside the fund checks. Rebuilding it takes the fund's audited statements, the investor's side letter and half an hour.
| Line | Fund |
|---|---|
| Opening partners' capital | 300,000,000 |
| Contributions | 40,000,000 |
| Distributions | −60,000,000 |
| Net investment loss (fees and expenses less income) | −8,000,000 |
| Net realised gain | 30,000,000 |
| Net change in unrealised gain | 22,000,000 |
| Carried interest reallocated to the general partner | −8,800,000 |
| Closing partners' capital | 315,200,000 |
The investor committed 20,000,000 to a fund with 400,000,000 of commitments, a share of 5.00 per cent. Its side letter gives it a 25 per cent discount on the management fee. The fund's management fee for the year, at the full rate before any side letter discount, is 6,000,000, inside the net investment loss, and is far enough past its hurdle that carry accrues at 20 per cent of each additional unit of profit. The statement received shows a closing balance of 15,842,500.
Closing = opening + own contributions − own distributions + share × (income, realised, unrealised, carry) + own terms
Fee discount = share × fund management fee × discount; carry on it = −discount × carry rate
In Excel, one column for the fund and one for the investor: =FundLine*Share for the allocated lines, the investor's own cash flows typed from its bank statements, and a separate block for each side letter term so that each can be switched off and its effect seen.
Two rules make the rebuild work. Take the opening balance from last year's statement, already reconciled, rather than as a percentage of the fund's opening, so that earlier years' individual terms are carried in it. And take contributions and distributions from the investor's own cash records, not from the fund's totals: they are the only lines in the account that can be verified against something the administrator did not produce.
| Line | Investor |
|---|---|
| Opening balance, last year's statement | 15,000,000 |
| Contributions paid | 2,000,000 |
| Distributions received | −3,000,000 |
| Net investment loss, 5.00% | −400,000 |
| Net realised gain, 5.00% | 1,500,000 |
| Net change in unrealised gain, 5.00% | 1,100,000 |
| Carried interest, 5.00% | −440,000 |
| Pro rata closing balance | 15,760,000 |
| Fee discount: 25% of 300,000 | 75,000 |
| Carry on the discount at 20% | −15,000 |
| Rebuilt closing balance | 15,820,000 |
| Closing balance per the statement | 15,842,500 |
| Unexplained difference | 22,500 |
The statement sits 82,500 above the pro rata figure. The side letter explains 60,000 of it: the investor's share of the fee is 300,000, the discount saves 75,000, and because that saving is extra profit the general partner takes 20 per cent of it, 15,000, as carry. The remaining 22,500 is 0.14 per cent of the balance, and no term in the documents produces it.
| Fee discount | Fee saved | Carry on it | Net to investor | Rebuilt balance |
|---|---|---|---|---|
| 10% | 30,000 | −6,000 | 24,000 | 15,784,000 |
| 25% | 75,000 | −15,000 | 60,000 | 15,820,000 |
| 50% | 150,000 | −30,000 | 120,000 | 15,880,000 |
Two things follow. Once a fund is in carry, a fee discount is worth only 80 per cent of its face value, so an investor comparing side letters should compare them net of carry. And a 50 per cent discount would have put the rebuilt balance above the statement, at 15,880,000: an unexplained difference can run either way, and a statement below the rebuild is as much a finding as one above it.
The common mistake is to check the closing balance against the percentage of the fund, 5.03 per cent here against 5.00 per cent of commitments, decide that the difference is about the size of the fee discount, and stop. That test cannot find anything: a difference of the right order is exactly what an allocation error also looks like. The rebuild has to be line by line, and every unit of divergence from pro rata has to carry the name of a term.
Roll the account forward from last year's balance, using your own cash and your share of each fund line, then price each side letter term separately, net of carry. What is left is the question to send the administrator. The capital account calculator in the free workbooks for this book decomposes a divergence the same way, and recomputing the management fee is the natural next check on the same pack.
Because individual terms move it: fee discounts, excused investments, late-closing equalisation and different carry rates. In the illustrative case the investor holds 5.00 per cent of commitments but 5.03 per cent of net assets: a 25 per cent fee discount saves 75,000 a year, of which carry takes back 15,000, and 22,500 is left unexplained. Every divergence should be traceable to a named term.
No, it increases it. A fee discount raises the investor's profit, and once the fund is past its hurdle and catch-up the general partner takes its carry share of that extra profit. A 75,000 fee saving at a 20 per cent carry rate is worth 60,000 to the investor, not 75,000.
Any unexplained difference is a question, whatever its size, because it may be a recurring allocation error. Here 22,500 is 0.14 per cent of a 15,842,500 balance, small in value, but if it is an expense the investor was excused from it will repeat every year. Ask the administrator for the allocation behind it.
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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