The exit of a portfolio company worked through the fund's books: net proceeds, escrow, the reversal of the prior mark, the journal entries and the escrow true-up.
On the exit of a portfolio company the fund books a realised gain equal to net proceeds less cost, and reverses the cumulative unrealised gain it was carrying. An investment costing $60.0m, marked at $85.0m and sold for $89.5m net books a realised gain of $29.5m and an unrealised reversal of minus $25.0m. The exit adds only $4.5m to NAV in the quarter; the rest was recognised in earlier marks.
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 →
Investors see a press release with a sale price. The fund's statement of operations shows two lines moving in opposite directions, and a controller has to be able to bridge the headline to both. The figures below are illustrative.
| Input | Amount |
|---|---|
| Cost of the investment | 60.0 |
| Fair value at the prior quarter end | 85.0 |
| Headline sale price for the fund's stake | 92.0 |
| of which held in escrow for twelve months | 5.0 |
| Expected escrow release | 80% |
| Transaction costs borne by the fund | 1.5 |
Cash at closing = 92.0 − 5.0 = 87.0
Escrow receivable at fair value = 5.0 × 80% = 4.0
Net proceeds = 87.0 + 4.0 − 1.5 = 89.5
The escrow is deferred consideration. It is recognised as a receivable at fair value, reflecting the claims expected against it, not at face. Here the expected release is used undiscounted for clarity; with a twelve-month hold, a full fair value would also discount it for time. The transaction costs reduce the proceeds; they are not a fund expense.
Realised gain = net proceeds − cost = 89.5 − 60.0 = 29.5
Unrealised gain carried = 85.0 − 60.0 = 25.0, reversed: −25.0
Net change in the quarter = 29.5 − 25.0 = 4.5 = net proceeds − prior fair value
In Excel: =Proceeds-Cost for realised, =-(PriorFV-Cost) for the reversal; check that their sum equals =Proceeds-PriorFV.
The $4.5m is the uplift to the last mark, 5.3 per cent of the $85.0m carrying value. It is the only part of the exit that changes NAV this quarter. The $25.0m was already in NAV; the sale converts it from unrealised to realised.
| Account | Debit | Credit |
|---|---|---|
| Cash (87.0 less 1.5 of costs) | 85.5 | |
| Escrow receivable | 4.0 | |
| Investment at cost | 60.0 | |
| Realised gain on investments | 29.5 | |
| Total | 89.5 | 89.5 |
| Net change in unrealised appreciation | 25.0 | |
| Investment, unrealised appreciation | 25.0 |
After both entries the investment carries nothing: cost and appreciation are both cleared. If a residual balance remains on the investment line for a company the fund no longer owns, one of the entries is missing.
The distribution follows the cash, not the gain. The fund has $85.5m to distribute after costs: $60.0m that returns the cost of the investment and $25.5m above it. The $4.0m escrow receivable is part of NAV but cannot be distributed until it is released, so the $25.5m distributed above cost and the realised gain of $29.5m differ by exactly that amount. Investor capital accounts are allocated the realised gain and the unrealised reversal as two separate lines, and the distribution as a third, so each limited partner's statement should show the same three figures in proportion to its interest.
The split also matters beyond the accounts. Waterfalls that pay carried interest deal by deal, or that test the preferred return on realised proceeds, run on the realised side. A controller who reports a $4.5m gain on the exit in the quarterly letter and a $29.5m realised gain in the financial statements is reporting both correctly, and should say which is which.
| Escrow released | True-up to realised gain | Final realised gain | Final multiple |
|---|---|---|---|
| 0.0 | −4.0 | 25.5 | 1.43x |
| 2.5 | −1.5 | 28.0 | 1.47x |
| 4.0 | 0.0 | 29.5 | 1.49x |
| 5.0 | 1.0 | 30.5 | 1.51x |
The true-up is recorded as realised gain or loss when the escrow is settled, and the receivable is remeasured at each quarter end in the meantime. The multiple reported at exit, 1.49x on recognised proceeds, should not be reported as the 1.53x the headline price implies: that number assumes the full escrow and no costs.
The control. Realised gain plus the unrealised reversal must equal net proceeds less the prior quarter's fair value. If it does not, either the mark, the proceeds or one of the entries is wrong, and the NAV bridge will not close.
The quarter-end close in which entries like these are checked by two routes to the same NAV is in the free workbooks for the book, and worked in why a quarter-end close needs two routes to the same NAV.
Because the gain already recognised in earlier quarters moves from the unrealised line to the realised line. In the worked case $25.0m of appreciation was carried at the prior quarter end; on sale it is reversed and a realised gain of $29.5m is booked. Only the difference, $4.5m, is new value in the quarter.
At its fair value, as a receivable, with the realised gain measured on that amount. A $5.0m escrow expected to release 80 per cent is booked at $4.0m. If it later releases in full, a further $1.0m of realised gain is recorded; if nothing comes back, the realised gain falls by $4.0m to $25.5m.
Not quite. It is net proceeds minus cost: deduct transaction costs and value deferred consideration such as escrow at fair value. The headline here is $92.0m less $60.0m, or $32.0m; the realised gain the fund books is $29.5m.
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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