In terms of waterfalls, fund types vary widely. Fund accounting must be familiar with the particulars of waterfalls for all fund types. For example, with a planned internal rate of return (IRR), real estate fund investors expect consistent profits on their investments. In terms of fund accounting, the investor is essentially a fixed-cost debtor to the fund. In most cases, there will be a mid-stream waterfall with a return cap. – In traditional private equity fund accounting, fund proceeds are normally shared by the LPs and GPs throughout the fund’s life. Investors in hedge funds seeking short-term gains prefer quarterly returns, net of carried interest, with all parties benefiting together after that.
The general partner (GP) normally contributes a small sum to the fund (the “GP co-investment”), usually 1 to 2% of the overall commitment. The general partner will allocate this amount depending on the waterfall structure when fund accounting distributes funds back to investors. The money to be transferred to the GP is maintained by the GP prior to the waterfall. The amount to be given to each LP by fund accounting will subsequently be redistributed between the GP and the LPs via the waterfall.