Fund accounting system: what it holds, calculates and reports

The system that turns a custodian file and an investor register into a NAV, a fee accrual, an allocation for each investor and a statement an LP will accept is a fund accounting system. It is the system of record for an investment fund: its transactions, positions, capital accounts, and the calculations that come off them.

This article is about that system in an investment fund: private equity and other closed-end vehicles, hedge funds, ETFs, real estate. Nonprofit and church fund accounting is a separate discipline with its own software, and if that is what you need, this page will not help.

Your version gets checked by people outside your firm. The custodian’s records have to agree with yours, an auditor samples the working, and an LP reading a capital account statement expects the same figure, reached the same way as last quarter. That is a higher bar than a spreadsheet that balances, and it is the bar the system has to be built to.

Here is what such a system holds, what it calculates, what it reports, the systems it has to talk to, and the point at which building around your own close beats adopting a licensed platform.

Key takeaways

• A fund accounting system is judged on three outputs: a NAV that reconciles to a third party’s records, an allocation per investor, and statements an auditor will accept.
• The work is a fixed loop: positions, accruals, capital activity, allocations, NAV. What differs between funds is the rules applied inside it, not the order of the steps.
• Integrations decide the schedule more often than the calculations do. Custodian files and market data contracts belong to other companies and move on their timelines.
• A licensed platform is adopted and configured. A system built for you is owned and handed over with its code.
• Look for the failure nobody owns: a reconciliation without an owner, and a workbook only one analyst understands.

What a fund accounting system is

It is the system of record for one fund or a family of funds. Everything the fund owns, owes, earns and owes to its investors passes through it, and the figures it produces are the ones that get published, audited and filed.

The difference from a general ledger is obligation. A general ledger records what happened and leaves the meaning to a person. A fund accounting system records the same activity and is expected to produce the fund’s own numbers from it: a NAV, a fee accrual, an allocation per investor. Those numbers leave the building and get compared against somebody else’s.

One more distinction, because the phrase is used two ways. Nonprofit fund accounting means keeping restricted money separate from unrestricted money and reporting on each. That work has its own rules. If your funds have investors, units or capital accounts, the rest of this page describes yours.

What the system holds

Six kinds of record do almost all the work. If a system cannot hold one of them at the level your fund needs, no report built on top of it will be right.

• A chart of accounts segmented three ways, by fund, by legal entity and by asset class, so one transaction can be reported to the fund, to the entity holding it and to the strategy it belongs to.
• A capital account for each investor, carrying commitments, contributions, withdrawals and allocated income and expenses, with the history rather than the closing balance alone.
• Subscriptions, redemptions and capital calls, with the notice that went out, the amount, the due date and the cash that arrived against it.
• Distributions and waterfall tiers, in the order the fund pays them, with the hurdle each tier depends on.
• Accrued fees and expenses: management fees, performance fees, administrator and custody charges, and the period each is calculated over.
• Positions and their valuations, with the price source and the date each one was taken, so a figure can be traced to a vendor file rather than to a workbook.

What it calculates

Five calculations sit at the centre, and each carries a rule that differs from fund to fund.

• NAV, per unit and per fund, struck at the frequency the fund’s documents require. Monthly for a hedge fund, quarterly or at a set valuation date for a closed-end vehicle.
• Management fees, on the base the documents define, which is rarely the headline commitment once the fund is a few years in.
• Performance fees and carried interest, with the hurdle, the catch-up and the crystallisation date each tier depends on.
• Allocations, per investor, from the fund total down to the individual capital account.
• The multiples reported to LPs (IRR, DPI, TVPI), which have to come off the same numbers as the statements do.

A general ledger will hold the arithmetic. What it will not do is keep the rule beside the calculation, so the same fee produces the same figure next quarter without somebody remembering how it was worked out the first time.

Audit is the obligation the system has to survive. An analyst needs to open a published figure a year later, show the inputs behind it and show who approved it. Audit and assurance standards, of the kind AICPA & CIMA publishes, are written to test exactly that. If reconstructing a figure means opening a workbook and reading a formula, the work never left the spreadsheet.

What it reports

Reporting is where the system stops being internal. Each output goes to somebody who did not build it, and none of them can be asked to take a figure on trust.

• Capital account statements, per investor, with the opening balance, the movements in the period and the closing balance.
• Capital call and distribution notices, with the amount, the due date and the calculation behind it.
• Fund financial statements, in the format the fund’s own documents and its auditor expect.
• The LP reporting pack, usually a template with a fixed shape. Where your LPs follow the template their association publishes, that format is a requirement rather than a preference. The Institutional Limited Partners Association publishes a reporting template its members use.
• The filing your regulator requires, at whatever frequency the fund’s domicile sets. The system produces the figures and the working behind them; the filing stays a process your firm owns.

Where the fund is listed, add the outputs the vehicle needs: the daily NAV, the creation and redemption record and published fact sheets. The ETF platform we built for Motilal Oswal AMC covers schemes, NAVs, purchases, redemptions and fact sheets in one place.

The systems it has to talk to

Six sources carry a fund’s inputs: the custodian, the administrator or transfer agent, the market data provider, the bank and payment systems, identity and access, and the reporting layer. The fund accounting case adds one requirement to that list, and it sets the schedule more often than the calculation does. Every figure the reporting layer publishes has to tie back to the custodian’s records in the period it was struck, not at year-end. Our fund accounting software development page lists the six and where each one slips.

Licence or build: how the two differ

Two models reach the same place, and the difference is what you hold at the end. One is a product you adopt. The other is a system written against the close you run. We build and implement the second; we are not a licensed platform vendor.

A licensed platform arrives with a data model, a set of options and a release cycle, and you fit your close to the parts the product already does. A build starts from the close as it runs today. The parts that make your fund different from the standard model are the first things specified rather than the things worked around. That is what a fund accounting build covers.

Compare the two by mechanism, not by vendor.

Point of comparison	A licensed platform	A system built for you
What arrives	A working product with a fixed data model	A system specified against your written close
Where the rules live	In configuration, inside the vendor’s model	In your repository, beside the calculations they govern
Who changes the close	The vendor’s release cycle and roadmap	Your team, on your schedule
Integrations	The connectors the product already ships	Every source mapped and built, including the awkward ones
Time to first release	Shorter, because the product exists	Longer, because scoping and the hardest screen come first
Cost shape	Licence or subscription, plus implementation and configuration work	Project cost for the build, then your own team’s running cost
What you hold at the end	A licence, a configuration and your data	The code, the deployment process and the documentation
Right for	Funds whose structures sit close to the model the product was designed around	Funds whose calculations, reports or integrations are the reason they exist

One test applies to both columns. The system has to rebuild a published figure from its own records and show who approved it. A product or a build that cannot pass that test has left the real source of the numbers where it was.

What a build covers, in six steps

The delivery runs in six steps: scope the workflow being replaced, prototype the hardest screen, map every system to integrate, two-week increments, a security and compliance review before launch, then hand over the code and the knowledge. They are the steps documented on our fintech software development page. Two things change for a fund close. The hardest screen is usually the NAV roll-forward or the capital account, and the first step decides the rest, because a close nobody has written down cannot be specified.

Where the work usually hurts

Most of what goes wrong in a fund close is not arithmetic. It is a check that nobody was named to perform. Five of those turn up in most firms.

A close that runs to days rather than an afternoon is waiting on handoffs. A file arrives, no one owns it, and it sits until somebody notices. The fix is a name against each input, so the close has a queue instead of a search.

Capital calls assembled on a spreadsheet fail on approval rather than on the calculation. The amounts are right, the notices go out, and nobody signs the version that was sent against the commitment schedule. When a limited partner queries an amount six months later, the answer depends on which copy of the file someone opens. The control that is missing is the approval step, with the schedule it was checked against attached to it.

Investor statements built by hand fail on completeness. The format lives in one person’s workbook, so the only check that every investor is included is done by the person doing the assembling. Nobody notices the omission until an LP does. An owner for the template, separate from the owner of the run, is the check that is usually absent.

The quiet one is the expensive one. A NAV reconciles to the custodian’s file, the statements go out, and nothing looks wrong, because the figures underneath come from a workbook kept beside the system. Reconciling the total proves the total and nothing below it.

The check that is missing there is reconstruction: take last quarter’s published NAV and rebuild it from the transactions the system holds. An afternoon means the system is doing the work. A week means the workbook still is.

The last version is the one most firms run without knowing. One analyst knows how a figure was reached, including the exception that was never written down. No second person can run the close from the written process while that analyst is away. Until there is one, the process lives in a head, and no software purchase changes that.

From there the work is ordinary, and most of it is writing things down: the close in order, an owner for every input, an approval step between preparing a number and publishing it. We built Fintent’s fund accounting system, which replaced a close that had run on spreadsheets and manual steps. Their team runs it now, and the code went with it.

What to do before you buy or build

None of this needs a vendor or a budget. Three things you can do this month:

• Write the close down. The steps in order, who performs each one, and every place a number is typed in by hand. If two people write it separately and the lists differ, you have found the first problem worth fixing.
• Follow one figure. Take last month’s NAV and list every system it passes through between the custodian’s file and the LP statement. Anything that appears more than once is a reconciliation you are running by hand.
• Count the people and the days. How many people touch the close, and how many days it runs. That is the baseline any platform or build has to beat, and it is the only number that is comparable across the two.

FAQ

What is fund accounting for private equity?

It is the accounting for a closed-end fund. Investors commit capital, the fund draws it down through capital calls, holds and values the portfolio, and returns money through distributions. The records that carry it are one capital account per investor and the fund’s NAV. Compared with a hedge fund’s monthly cycle, private equity adds capital calls, waterfall tiers and carried interest.

Which software is used for fund accounting?

Four arrangements cover almost all of it: a licensed platform configured to the fund, an administrator’s own platform, a system built for the firm’s close, and spreadsheets beside a general ledger. That last one is where most of the teams we meet start. Which of the others fits depends on how much of your close differs from the standard model.

What are the types of fund accounting?

Split it by vehicle, not by software. Closed-end funds such as private equity, real estate and infrastructure run capital calls, distributions and waterfall tiers. Hedge funds and other open-end funds run subscriptions and redemptions against a periodic NAV. ETFs add a daily NAV, creation and redemption activity and published fact sheets. Nonprofit fund accounting is a separate discipline with its own rules.

What is the best private equity fund accounting software?

There is no single answer, and this site does not publish vendor rankings. Test any option on six things: can it reproduce a figure and show the working, does it separate preparing from approving, how does it take a custodian file, what happens when a reconciliation breaks, how far does it go on capital activity, and who owns the code and the data when you leave.

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