Fund Accounting Automation: Say Goodbye to Manual Bookkeeping with LemonEdge Allocations

Multi level fund structures

Funds with multi-level entities are now routinely deployed in private capital markets fund structures. However, while these sophisticated arrangements achieve all the required financial management objectives, they induce several consequential issues to be managed.  

The main issue with multi-level structures is tracking the allocation of investments/disinvestments, fees, etc through the structure, ensuring consistent, reconciled, audited data. But there are other complications to that basic need such as:

·        The use of different accounting standards at different levels within a structure

·        Managing different investor classes (for example different fee structures, jurisdictions, or currencies) as well as different investor profiles within the classes including those investors who make different opt-out or defaulting decisions

·        Minority interests in a structure, especially when the record-keeping of those interests is held on a different system, potentially at a different organisation

These challenges are compounded in downstream processes such as:

Equalisations of positions to correctly reflect all scenarios under all circumstances (including the use of real-time dynamice qualisations)

·        The production of valuations

·        Regulatory reporting

·        Internal/external audits

If the data is not perfectly aligned, any compromises or errors will show up, especially in the ultimate deliverable of the financial statements. Without a sophisticated automated solution, managing theseinter-related challenges becomes an intensive manual battle that is fraught with risk of errors.

Carry-linked entities and co-invests

Accurately determining the carried interest for a carry-linked entity or fund requires the precise calculation of allocations,return thresholds, then ultimately the profits to be assigned to the carry vehicle.  

Those calculations need to:

·        Accommodate appropriate financial periods, details of realization events, as well as the overall fund performance  

·        Supportco-invests as their contribution can be linked to other funds or other parts of a structure which then needs to be accommodated in the net position  

·        Directly link a carry vehicle to the contributing fund

In environments with material volumes of funds/carries,especially where there are multiple funds/generations of carry, these calculations need to be efficiently managed. Reporting all of the preceding is complex particularly with respect to taxor valuation reporting, including the production of individual investor capital accounts. Hence in such a challenging environment a detailed fully automated system quickly becomes essential.

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Multi-jurisdictional accounting compliance

When it comes to the broad topic of compliance there are a range of areas that need to be managed, some of which are more directly associated with bookkeeping than others. There are global directives such as AIFMD, FATCA/CRS, AML (with local variants) which can depend on accurate accounting records at entity level within fund structures. There are also tangential regulations such as ELTIF 2.0, SFDR or to a lesser extent, KYC,DORA or local oversight/ substance requirements, which can also potentially impact bookkeeping practices.  

The most significant demand however is in relation to local GAAP, (e.g. Lux GAAP) vs IFRS or US GAAP, where thea ccounting rules demand that funds operating across borders must reconcile different accounting standards, including with respect to consolidated reporting. The GAAP accounting challenge is at its most demanding in relation to the ever-changing rules around the jurisdiction-level requirements for local withholding tax when combined with transfer-pricing/BEPS compliance,here the calculations as well as the associated jurisdiction-specific documentation need to be supported by very detailed accurate book keeping records.  

Simultaneously supporting all of these needs, including the potential need for local/national/international GAAP accounting records for some or all entities in a fund structure is particularly challenging without avery sophisticated automated system.

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Range of asset classes (including open-ended or Shari’a-compliant variations)

Across the private capital markets funds industry there area range of asset classes, which while similar in basic respects - such as typically being multi-currency, multi-jurisdictional, multi-entity structures-they have significant variations at the detailed level each of which represents different demands in terms of bookkeeping needs.

The Private Equity (PE) asset class is often used as a synonym for the entire private capital market but is in fact a distinct sub-sector with specific bookkeeping needs. PE asset class fund soften require support for:

·        Complex structures

·        Fair value accounting (especially for illiquid, early-stage or distressed portfolios)

·        Waterfall distribution models with sophisticated layering of calculation rules based on attributes such as share class, or complex claw-back models which can reverse previous distributions from GPs to LPs

Beyond the PE asset class other distinct asset classes have many of the same characteristics as well as their own additional challenges.

·        Infrastructure(Infra) funds can require the need for bookkeeping processes to manage depreciation schedules, inflation-linked cash-flow models or long-term liability matching.  When infrastructure funds are linked to government investments there can be a requirement for them to be compliant with local lease accounting provisions as well as regulated returns policies.

·        RealEstate (RE) funds share some of the same challenges as infrastructure funds but are characterized by the need for the bookkeeping associated with rentals, maintenance payments, insurance as well as recording/tracking vs long-term capital improvement targets.

·        Private Credit/Debt funds on the other hand are at their most demanding from an accounting perspective. They need complex interest rate modelling including the associated bookkeeping entries required to manage the cash-flows/financials ofthe investments/fund, in particular the tracking of breaches or any restructuring arising.  These credit/ debt fund requirements are exacerbated when loans are syndicated across multiple investors or other related structures, where not only the interest accrual modelling but the related fee modelling/allocation can become complex.

·        Venture Capital (VC) funds are different to the other major asset classes being typically smaller investments of higher risk hence with more frequent write-offs, thus requiring detailed bookkeeping for impairment tracking,including the consequent impact on fund valuation reporting.  VC’s also require cap table and performance milestone modelling, which are again demanding intensive record-keeping processes at the accounting detail level.

·        Fund of Funds (FoFs) may include some or all of the above asset classes hence some or all of those characteristics can leak through to the associated bookkeeping,including in some cases the requirement for look-through to the bookkeeping of the underlying funds valuations, capital activity, etc. FoFs are also complicated by the lag of their valuation cycles compared to the valuation cycles of the underlying funds, again with knock-on effects to the bookkeeping.

·        Shari’a funds cover all of the above but with the variation that investments/ cash must be compliant with Shari’s law.  Those differences can have a direct effect on how the bookkeeping, hence accounting, hence reporting needs to be presented.

Finally in this high-level summary of asset class book keeping challenges there is a further variant of all of the above,including FoFs/ Shari’a asset classes, in that while private capital market funds will typically be structured as percentage ownership closed-ended funds,there is a parallel world of share/unit based open-ended funds aimed more toward the higher volume/lower value sector for the market.  Also known as Evergreen funds these share/unit open-ended structures again demand different bookkeeping rules, supporting different accounting need, with different reporting outputs.

Operational processes

Hanging over all of these challenges is the considerable pain that can arise due to the operational processes that occur in the real world such as the need to rollback or cancel or correct transactions (each have subtle differences) where without a system that automates the associated bookkeeping the pain can multiply seemingly without end.

The above canter across the challenges associated with bookkeeping explains why full automation, across all scenarios, has remained out of reach. Until now.

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🍋 How LemonEdge Delivers Full Automation 🍋

LemonEdge was built with today’s complexity in mind. Our Allocations engine is designed from the ground up to handle the full spectrum of modern fund structures and transactions, automatically.

Here’s how we do it:

🔁 Allocation Paths

Every transaction follows a defined route through your fund structure - from top-level holding companies to underlying investments. No matter how complex the structure, LemonEdge maps it.

📐 Allocation Rules

Rules define how each transaction is allocated across investors at every level. Whether it’s by commitment, value, or dynamic variables from internal or external data sources, our rules engine handles it.

🔗 Allocation Mappings

Mappings connect transaction types to the right paths -keeping everything dynamic and real-time. No more hard-coded logic. Just flexible, scalable automation.

✂️ Split Transactions

Need to split a transaction across multiple fund structures? No problem. Our Split Transactions feature automates even the most complex cross-structure allocations- accurately and effortlessly.

The Result?

LemonEdge clients are transforming their back-office operations. What used to be manual, error-prone, and time-consuming is nowfast, accurate, and fully automated.

🚀 Ready to See It in Action?

If you're ready to leave behind the limitations of legacy systems and take control of your transaction bookkeeping with trueautomation, book a demo with LemonEdge today.

👉 Schedule Your Demo Now-See The Future of Fund Accounting - Book a Demo

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