Author: Gert-Tom Draisma / www.TristanFinance.com
First published: 24th of September 2026
Latest update: 24th of September 2026
Earlier parts of this book established an important distinction between accounting for a private equity fund and understanding its economic performance.
In Part II — What Makes Private Equity Different, we saw that private equity is an illiquid, long-duration form of ownership in which capital is committed for many years and value is created and realised over time rather than continuously through a liquid market.
Part III then introduced the mechanics through which that capital moves: commitments, capital calls, investments and distributions. Part IV placed those cash flows within the broader lifecycle of the fund, from fundraising and investment through portfolio management, harvesting and eventual liquidation.
Those characteristics produced the phenomenon examined in Part V — The J-Curve. A private equity fund can incur expenses and report losses during its early years while simultaneously building a portfolio that may ultimately generate excellent returns. Conversely, a fund can later report substantial unrealised gains without yet having converted those gains into cash.
The J-curve therefore demonstrated something fundamental:
The accounting position of a private equity fund at a particular moment in time is not the same thing as the economic performance of that fund.
That distinction was developed further in Part VIII — Measuring Performance. There we saw why a conventional ROI calculation, or simply reading the fund's balance sheet and profit and loss account, is insufficient for assessing private equity performance.
Private equity performance instead has to be understood through the interaction between:
cash flows + time + realised distributions + residual value + fund maturity.
This is why private equity uses measures such as IRR, DPI, RVPI and TVPI, and why even those measures only become meaningful when considered in the context of the fund's age, strategy and vintage year.
These earlier concepts become critically important when we turn to carry data.
Because the same distinction that exists between accounting and performance also exists between fund accounting and carried-interest accounting.
The administrator's accounting perspective
Private equity funds typically appoint an external fund administrator to maintain the accounting records of the fund and produce periodic investor reporting. Depending upon the mandate, the administrator may maintain the general ledger, process transactions, reconcile bank accounts, calculate NAV, maintain investor capital accounts and produce quarterly financial statements and Capital Account Statements.
These are important functions.
They provide the fund, its investors, auditors and other stakeholders with an organised accounting record and an independent administrative layer.
But the administrator's principal data architecture is normally designed around a fundamentally accounting-oriented question:
What must we record in order to produce the fund's books, NAV, financial statements and investor capital accounts correctly?
That is not necessarily the same as asking:
What information must we preserve in order to understand the economic performance of the fund and determine precisely how that performance should be shared under the carried-interest provisions of the LPA?
The difference may initially appear subtle.
It is not.
Part VIII already showed us the problem
Recall the distinction made in Part VIII — Measuring Performance between DPI and TVPI.
A fund might report:
TVPI = 2.0×
but that number could consist of:
DPI 1.8× + RVPI 0.2×
or:
DPI 0.2× + RVPI 1.8×.
The accounting NAV may allow both funds to report the same total value.
Economically, however, the two situations are very different.
In the first case, most of the value has already been converted into cash.
In the second, most of the performance remains dependent upon the future realisation of portfolio valuations.
As we saw in Part VIII, this distinction becomes increasingly important as a fund matures.
The fund administrator can correctly produce the balance sheet and P&L without necessarily providing the analytical framework required to understand this difference.
And that matters enormously for carried interest.
The J-curve becomes a data problem
The J-curve discussed in Part V is usually presented as an investment-performance concept.
But by the time we reach carried interest, it has also become a data architecture problem.
The J-curve exists because contributions, expenses, investments, valuation changes, realisations and distributions occur at different times throughout the life of the fund.
As Part VIII demonstrated, performance can only be understood by preserving that chronology.
Carried interest requires an even more detailed version of the same history.
The question is no longer merely:
How has the fund performed?
It becomes:
Given everything that has happened since inception, how should the resulting economics now be allocated between the LPs and the GP?
That cannot normally be answered from the current balance sheet alone.
Nor can it necessarily be answered from the P&L.
And it cannot be answered simply by looking at the closing balances on the Capital Account Statements.
The path matters.
The administrator often sees carry as a formula
This is where the limitations of the traditional fund-administration perspective frequently become apparent.
Carried interest can appear to be a formula:
Contributions + distributions + preferred return + waterfall = carry.
Once the formula has been coded into a spreadsheet or system, the problem appears solved.
But the earlier Parts of this book should by now make clear why that is an incomplete way of looking at the problem.
Part III showed that not all capital movements necessarily have the same economic meaning.
Part V showed that the sequence and timing of those movements matters.
Part VIII showed that the same apparent value can represent realised cash or unrealised NAV and that timing fundamentally changes the economic return.
And Parts VI and VII showed that an equity return itself may arise from different sources: operating improvement, growth, multiple movement, debt repayment and leverage.
Carried interest sits on top of all of this.
The mathematical waterfall is therefore usually the easy part.
The difficult part is establishing the economic facts to which the waterfall must be applied.
From performance data to carry data
The relationship can be represented as a progression:
Fund Accounting → Performance Measurement → Carried-Interest Allocation
Each stage requires the previous stage, but adds another layer of information.
Fund accounting asks:
What happened and how should it be recorded?
Performance measurement, as discussed in Part VIII, asks:
What economic return resulted from those events, taking account of their timing and the distinction between realised and unrealised value?
Carried-interest accounting then asks:
How must that economic result be allocated under the contractual provisions of the LPA?
The data requirements become progressively more demanding.
An accounting system may correctly know that:
€10 million was distributed on 30 June.
Performance measurement needs to understand that distribution as part of the investor's complete cash-flow history.
The carry calculation may need considerably more information still.
Was the €10 million:
- income or capital?
- generated by a realised investment?
- recallable?
- recyclable?
- attributable to a particular investment?
- included in the preferred-return calculation?
- treated as a return of contributions?
- subject to a deal-by-deal waterfall?
- allocated proportionately among all investors?
- relevant to an earlier or later closing?
- sufficient to trigger a catch-up?
- associated with carry already distributed?
- relevant to a future clawback calculation?
The accounting transaction has not changed.
The economic metadata required around it has.
The loss of economic history
This brings us back to another central lesson of Part VIII.
Private equity performance is path-dependent.
A closing value alone does not tell us how the investor arrived there.
The same is true—arguably even more strongly—for carried interest.
Suppose an investor's Capital Account Statement shows a closing balance of:
€6 million.
That €6 million may be completely correct.
But it does not necessarily tell us:
- how much the investor originally committed;
- when capital was contributed;
- what those contributions funded;
- which amounts were returned;
- which distributions were recallable;
- what was recycled;
- how preferred return has accrued;
- how equalisation was treated;
- what carry has previously been allocated;
- or what the investor's current position is in the waterfall.
The closing balance is the result of history.
Carry often requires the history itself.
This is exactly analogous to the distinction made in Part VIII between saying that a fund has a 2.0× TVPI and understanding the sequence of cash flows, distributions and residual value that produced that 2.0×.
The Capital Account Statement is therefore not the waterfall
This distinction deserves emphasis.
A Capital Account Statement is not a carried-interest statement.
It may contain much of the accounting information from which parts of the waterfall can ultimately be derived.
But the investor's accounting capital account and the investor's economic position in the waterfall are not necessarily identical concepts.
This becomes particularly obvious in more complicated structures involving:
- subsequent closings;
- equalisation;
- management-fee contributions;
- recycling;
- recallable distributions;
- excuse and exclusion provisions;
- alternative investment vehicles;
- parallel funds;
- different investor classes;
- preferred-return calculations;
- deal-by-deal waterfalls;
- GP catch-up;
- escrow;
- and clawback.
A quarterly Capital Account Statement was never designed to explain all of those relationships.
Expecting it to do so confuses financial reporting with economic allocation.
Why shadow accounting becomes necessary
We can now see why shadow accounting so frequently emerges.
The problem is not necessarily that the official accounting records are incorrect.
The problem is that they contain a different dimension of truth.
The accounting ledger is designed to produce reliable financial statements and investor capital accounts.
The carry process needs an additional economic record capable of reconstructing the fund from inception through the lens of the LPA.
That record may need to preserve:
Commitment
↓
Capital calls
↓
Purpose and classification of contributions
↓
Investment allocations
↓
Fees and expenses
↓
Investment realisations
↓
Distributions
↓
Recallability and recycling
↓
Preferred-return accrual
↓
Catch-up
↓
Carry distributions
↓
Residual entitlement
↓
Potential clawback
The administrator's ledger may contain transactions underlying every one of these events.
But unless the relevant economic attributes have also been preserved, those transactions may not be sufficient to reproduce the waterfall.
A separate dataset therefore develops.
That is what becomes the shadow accounting environment.
Shadow accounting is not fundamentally a spreadsheet problem
This distinction is important for Chapter 11.
It is easy to conclude that the solution is simply to replace the spreadsheets with software.
But if the underlying problem is incomplete economic data, digitising the spreadsheet does not solve it.
The real problem is the absence of an appropriate carry data model.
The system must know not only:
What was posted?
but:
What did it mean?
And, ultimately:
What does the LPA say should happen because of it?
That requires a connection between three layers:
Transaction data
↓
Economic classification
↓
LPA interpretation
Only after those three layers exist does the waterfall calculation become reliable.
Why understanding the “why” matters
This is perhaps the central weakness of treating carried interest as merely a formula.
A formula can produce an answer.
It cannot determine whether the inputs economically belong in the formula in the first place.
Nor can it explain why a particular provision of the LPA applies.
A robust carry process therefore needs to answer not merely:
“What is the carry?”
but also:
“Why is this the carry?”
The answer should be traceable:
Carry result
↓
Waterfall calculation
↓
Economic classification
↓
Investor and fund cash-flow history
↓
LPA provision
↓
Underlying accounting transaction
↓
Source documentation
This traceability is what turns a calculated number into a defensible carried-interest determination.
The connection to the earlier Parts
The logic developed throughout the earlier Parts of this book therefore converges here.
Part II explained why private equity's illiquidity and long duration make it different from ordinary liquid investments.
Parts III and IV explained how commitments, capital calls, investments, distributions and the fund lifecycle create a long sequence of economic events rather than a single purchase and sale.
Part V — The J-Curve demonstrated why the accounting position at an intermediate point in that lifecycle cannot be confused with ultimate investment performance.
Parts VI and VII separated underlying value creation from the financing and leverage through which that value becomes an equity return.
And Part VIII — Measuring Performance demonstrated why understanding that return requires IRR, DPI, TVPI, maturity and appropriate vintage-year benchmarking rather than a simple P&L or ROI calculation.
Chapter 11 now takes the next logical step.
If understanding the performance of a private equity fund requires preservation of its economic history, then calculating the allocation of that performance through carried interest requires an even richer version of that history.
That is the fundamental carry-data problem.
And where the official administration environment has not been designed to preserve that information, shadow accounting is not an anomaly.
It is the predictable consequence of asking an accounting system to answer an economic question it was never designed to answer.
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