A transfer in the middle of a quarter forces the fund to split one quarter's results between two investors. The two accepted methods can give very different answers.
When an LP interest is transferred in the middle of a quarter, the quarter's results are split between seller and buyer either by days held (proration) or by when each item actually happened (an interim closing of the books). On an illustrative $20 million commitment transferred on 15 August, proration gives the seller $505,272 of the quarter's $1,033,000 of net income; an interim close gives it $157,446, because the exit that drives the quarter happened after the transfer.
Worked in full in The Private Equity Fund Controller Playbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Either way the fund's books close at the same number on 30 September. What changes is the seller's final capital account, the buyer's opening one, the tax allocation and, often, a price adjustment argued over between two secondary counterparties who both read the capital account statement. The controller has to pick a method the LPA allows, apply it line by line and be able to show the working.
| Input | Value |
|---|---|
| Commitment transferred | $20,000,000 (4% of a $500,000,000 fund) |
| Capital account at 30 June | $14,200,000 |
| Management fee, 1.5% of commitment, accrued daily | $75,000 for the quarter |
| Fund expenses, LP share, accrued daily | $12,000 |
| Exit on 2 September, gain over 30 June carrying value | $640,000 |
| Unrealised gain on the rest of the portfolio, Q3 | $480,000 |
| Interim valuation at 14 August, unrealised gain to date on the rest of the portfolio (exited company still at its 30 June value) | $200,000 |
| Capital call 10 September / distribution 20 September | $1,000,000 / $1,500,000 |
| Transfer effective | 15 August (seller holds 45 of 92 days) |
Net income for the quarter: −75,000 − 12,000 + 640,000 + 480,000 = $1,033,000. Closing capital at 30 September: 14,200,000 + 1,033,000 + 1,000,000 − 1,500,000 = $14,733,000. Both methods must land there. The call and the distribution fall after 15 August, so they belong to the buyer under either one.
Seller's share = quarter's net income × days held ÷ days in quarter = 1,033,000 × 45 ÷ 92 = $505,272.
Buyer's share = 1,033,000 − 505,272 = $527,728.
In Excel: =NetIncome*(Effective-QStart)/(QEnd-QStart+1), with Effective the first day the buyer holds the interest.
Proration needs nothing but the quarter-end close, which is why administrators default to it. Its weakness is plain in the line items: the seller gets $313,043 of a gain on a company sold 18 days after it stopped being a partner.
Items that accrue over time (fee and expenses) are still split by days, because that is how they are earned.
Items that happen on a date go to whoever held the interest on that date: the 2 September exit goes entirely to the buyer.
Valuation changes need a mark at the transfer date: $200,000 of unrealised gain to 14 August goes to the seller, the remaining $280,000 to the buyer. The exited company is assumed to have been carried at its 30 June value on 14 August; any uplift in its mark by then would also go to the seller.
Seller: −36,685 − 5,870 + 0 + 200,000 = $157,446. Buyer: −38,315 − 6,130 + 640,000 + 280,000 = $875,554.
| Q3 item | Seller, prorated | Buyer, prorated | Seller, interim close | Buyer, interim close |
|---|---|---|---|---|
| Management fee | −36,685 | −38,315 | −36,685 | −38,315 |
| Fund expenses | −5,870 | −6,130 | −5,870 | −6,130 |
| Exit gain, 2 September | 313,043 | 326,957 | 0 | 640,000 |
| Unrealised gain | 234,783 | 245,217 | 200,000 | 280,000 |
| Net income | 505,272 | 527,728 | 157,446 | 875,554 |
| Seller's closing capital, 14 August | 14,705,272 | 14,357,446 | ||
| Buyer's capital, 30 September | 14,733,000 | 14,733,000 |
The gap between methods is $347,826, or 2.4% of the opening capital account. It is the same money, booked to different names.
| Effective date | Seller's days | Interim mark | Seller, prorated | Seller, interim close | Difference |
|---|---|---|---|---|---|
| 1 August | 31 | 120,000 | 348,076 | 90,685 | 257,391 |
| 15 August | 45 | 200,000 | 505,272 | 157,446 | 347,826 |
| 1 September | 62 | 300,000 | 696,152 | 241,370 | 454,783 |
| 15 September | 76 | 380,000 | 853,348 | 948,130 | −94,783 |
The sign flips once the exit falls inside the seller's period. With an effective date of 15 September the seller is entitled to the whole $640,000 under an interim close and to only 76/92 of it under proration. The method that favours one party depends entirely on where the lumpy items fall, which is why it should be fixed in policy before the transfer request arrives, not chosen afterwards.
The common error is mixing the methods: prorating the exit gain because the administrator's system prorates by default, while giving the seller an interim mark because the transfer agreement mentions one. Each piece looks defensible and the total no longer reconciles to either method. A second error is forgetting that the tax allocation follows its own rules (in a US partnership, the varying-interest rules, which permit both an interim closing and a proration method but generally require extraordinary items, such as a gain on selling a capital asset, to follow the date on which they occur); agree with the tax team whether the book method will match, and say so in the transfer memo. The tie-out of the result to the statements each party receives is the same exercise as in how to reconcile a private fund capital account statement.
Practical fix: many GPs accept transfers only on the first day of a quarter. Seller and buyer then settle the economics between themselves through the purchase price, from a reference date they choose, and the fund's books need no split at all.
Proration is simple and wrong whenever a quarter has one large dated event; an interim close is right and needs a valuation at the transfer date. Know which one your LPA allows, run both, and show the difference before anyone asks. The book's quarter-end close, bridged from the administrator's draft to a corrected NAV, is in the free workbooks for the book.
Proration splits the whole quarter's net income by days held. An interim close splits accruals by days but gives each dated event, such as an exit, to whoever held the interest on that date, and needs a valuation at the transfer date. In the illustrative case the seller gets $505,272 under proration and $157,446 under an interim close, a difference of $347,826.
The buyer, under either method, because the buyer is the partner of record when the call is paid and the distribution is made. In the illustrative case the $1,000,000 call on 10 September and the $1,500,000 distribution on 20 September both sit in the buyer's capital account, which ends the quarter at $14,733,000.
Because a quarter-start effective date avoids splitting a quarter at all. The fund books the whole interest to the buyer from day one, and the seller and buyer settle the economics from their chosen reference date through the price. A mid-quarter date forces an allocation that in the illustrative case moves $347,826 between the two depending on the method.
This article is one calculation from The Private Equity Fund Controller Playbook. 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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