What is Fund Accounting?

Fund accounting is the specialised accounting method used by private market fund managers to track investor capital, portfolio transactions, income, and expenses. It provides detailed financial records at both the fund level and individual investor level.

The method is sometimes called partnership accounting because it reflects the relationship between general partners (fund managers) and limited partners (investors). Fund managers invest capital on behalf of their investors—not their own money—which creates distinct accounting requirements around allocation, reporting, and transparency.

Why Private Market Funds Need Specialised Accounting

Corporate accounting measures an organisation's overall profitability. Fund accounting tracks how investor capital is deployed, what returns each investor earns, and how expenses are allocated across the investor base.

This distinction matters because:

Private Equity

• Investors have different commitments: One LP might commit $10 million while another commits $500,000, requiring proportional allocation of income, expenses, and distributions
• Fee structures vary: Large investors often negotiate reduced management fees through side letters, creating different allocation calculations
• Timing differs: Investors may join a fund at different times, requiring equalisation adjustments
• Reporting requirements are investor-specific: Each LP needs detailed capital account statements showing their individual position

Real Estate

• Investors need clarity on the nature of their returns — distributions should distinguish between income returns (rental yield) and capital returns (property revaluation), as these have different tax implications for each investor
• Investors need transparency on how debt costs impact their returns — highly levered structures mean even small movements in interest rates can significantly affect per-investor distributions and overall yield

Private Credit

• Investors need visibility into the underlying loan portfolio — yield, credit quality, and duration — to understand the risk profile behind their returns
• Cash vs accrual income — the difference between interest accrued and interest actually received matters for investors assessing true distributable income

Core Responsibilities of Fund Accounting

For real estate, private credit, and private equity fund managers, fund accounting encompasses several critical functions:

• Maintaining Books and Records: Recording all fund-level transactions including investment purchases, sales, income, and expenses in accordance with compliance laws per jurisdiction. This includes managing general ledgers, accruals, prepayments, and reconciliations.
• Investor-Level Tracking: Managing capital calls, contributions, distributions, and redemptions for each investor. Transactions must be allocated correctly according to each partner's ownership percentage and any negotiated terms in the Limited Partnership Agreement.
• NAV and Unit Pricing: Calculating net asset value by subtracting total liabilities from total assets. For unit registry purposes, NAV determines the price at which investors subscribe to or redeem from the fund.
• Financial Reporting: Preparing semi-annual and annual financial statements, monthly or quarterly management accounts, and investor capital account statements. Institutional investors increasingly expect detailed reports delivered within days of the period end.
• Tax Preparation: Supporting year-end tax filings and distributing investor tax statements such as AMIT, AMMA, or PIE statements depending on jurisdiction.

The Complexity Challenge

Private market fund structures have grown significantly more complex. Fund managers now operate across multiple asset classes—credit, infrastructure, real estate—each with different valuation approaches and reporting requirements.

This complexity creates challenges:

• Waterfall calculations: Distributing profits according to tiered structures with preferred returns, catch-up provisions, and carried interest can consume hours of accounting time
• Multi-vehicle structures: Funds with parallel vehicles, feeder funds, and co-investment entities require consolidated reporting while maintaining separate investor-level records
• Illiquid asset valuation: Unlike public securities with daily market prices, private market investments require fair value estimates using income, market, or cost approaches

Many fund managers still handle these calculations in spreadsheets—a practice that creates risk and raises concerns among institutional investors conducting operational due diligence.

In-House vs Outsourced Fund Accounting

Fund managers typically choose between building internal fund accounting capabilities or outsourcing to a fund administrator.

In-house teams provide direct control but require hiring specialised staff and investing in accounting systems. As funds grow, the burden of attracting and retaining qualified fund accountants increases.

Outsourcing to a fund administrator provides access to experienced teams and established technology without the overhead of building internal capabilities. This approach allows fund managers to focus on investment activities while specialists handle the accounting workload.

Caruso's Fund Accounting Services

Caruso combines fund accounting expertise with integrated software to streamline these functions for private market fund managers. Our services include maintaining accounting books and records, unit pricing calculations, payment processing, tax preparation, and financial reporting—all within a single platform that provides complete visibility over your fund operations.