Author: Gert-Tom Draisma / www.TristanFinance.com

First published: 24th of September 2026

Latest update: 29th of September 2026

Private equity funds operate with a peculiar form of capital.

When an investor joins a traditional private equity fund, it normally does not transfer its entire investment to the fund on day one. Instead, it promises to make capital available when required.

That promise is the commitment.

The fund subsequently asks the investor to fund portions of that commitment through drawdowns, also commonly called capital calls.

Over time, money moves in the opposite direction. Investments are sold, income is received and excess cash is returned to investors through distributions.

At first sight, the cycle appears straightforward:

Commitment → Drawdown → Investment → Realisation → Distribution

But this simple sequence hides much of the machinery that ultimately makes carried interest complicated.

A distribution does not necessarily mean that an investor's commitment has permanently been used. Some amounts distributed may be recallable and can therefore be drawn again.

A drawdown does not necessarily have to be allocated according to commitment percentages. One investor may have opted out of an investment. Another may have been excused. A subsequent investment might therefore be allocated according to remaining commitment rather than original commitment.

A fund may invest in currencies different from its investors' commitment currency. Consequently, the amount of commitment consumed by an investment may depend upon exchange rates.

And not every movement relevant to the economic records of a fund necessarily involves cash. Funds and their administrators may process dry calls, dry distributions, deemed transactions, netted transactions and other non-cash movements.

These distinctions matter long before carried interest is actually paid.

Ultimately, carried interest is calculated from the history of the fund.

To understand that history we need to know, among other things:

• how much each investor committed;
• how much was called;
• what each call was for;
• which investments each investor participated in;
• how much capital has been returned;
• which returned amounts are recallable;
• how much commitment remains available;
• how profits and losses have been allocated;
• and how all of those amounts interact with the distribution waterfall.

The accounting records therefore do considerably more than produce financial statements.

They preserve the economic history from which carried interest will eventually be calculated.

1. The commitment comes before the cash

Suppose a private equity manager raises a €1 billion fund.

That does not ordinarily mean that €1 billion arrives in the fund's bank account at closing.

Instead, investors enter into contractual commitments to provide capital when called.

For example:

The fund can therefore describe itself as a €1 billion fund even though very little of that amount may initially have been funded.

This produces one of the first important distinctions in private equity:

Committed Capital ≠ Contributed Capital

Committed capital is the amount investors have promised.

Contributed capital is the amount they have actually funded.

The difference is broadly the investor's unfunded commitment, although, as we shall see, recallable distributions and other provisions can make the calculation considerably more interesting.

2. Why not draw everything immediately?

There is a simple economic reason.

Private equity managers generally do not know precisely when investments will be made.

If the entire €1 billion were transferred to the fund at inception and the manager needed three years to invest it, hundreds of millions could sit in cash earning relatively little.

That would create what is commonly called cash drag.

Consider an investor committing €100 million.

If the investor transferred all €100 million immediately but the fund only invested:

• €20 million in Year 1;
• €30 million in Year 2;
• €30 million in Year 3; and
• €20 million in Year 4,

a substantial part of the investor's money would have spent years waiting to be deployed.

Instead, the investor retains the money until the fund actually needs it.

The commitment structure therefore separates two things:

The obligation to provide capital

from

The timing at which the capital is actually provided.

This is one of the fundamental structural characteristics of closed-end private equity funds.

3. A commitment is nevertheless a real obligation

The fact that committed capital has not yet been funded does not mean that the investor can simply change its mind.

The investor has entered into a contractual obligation to fund valid capital calls made in accordance with the fund documents.

That obligation is economically important.

The GP may enter into an acquisition agreement knowing that it can call capital from its investors. Lenders may provide facilities partly because those commitments exist. Other investors participate on the assumption that all investors will honour their obligations.

A commitment is therefore not merely an indication of investment appetite.

It is part of the capital structure of the fund.

Failure to honour a capital call can consequently have severe consequences.

We will examine those consequences when we discuss the LPA. For the moment, the important principle is:

A commitment represents capital that has been promised, even though it has not yet been paid.

4. Commitment is also an allocation key

Commitment performs another function.

It frequently determines an investor's economic participation in the fund.

In our €1 billion example, LP A has committed €300 million and therefore represents 30% of total commitments.

If every investor participates in an investment proportionately, LP A would normally fund 30%.

For a €100 million capital call:

\[ LP_A = €100m \times 30\% = €30m \]

The same percentage may subsequently be used to allocate investment cost, income, realised proceeds, expenses and other economic items.

This is why commitment is much more than a fundraising statistic.

It can become one of the principal allocation dimensions running through the entire life of the fund.

But it is only the starting point.

As soon as investors are excused from investments, commitments change, recallable amounts arise, currencies move or different allocation rules apply, the apparently simple commitment percentage can cease to describe the actual economic participation of an investor.

5. From commitment to drawdown

Once the fund requires money, the GP makes a drawdown.

The terminology varies. One may encounter:

• drawdown;
• capital call;
• call;
• contribution notice;
• funding notice.

Economically they describe the same basic event:

The fund converts part of an investor's unfunded commitment into an obligation to transfer cash.

The source material describes a drawdown similarly as the process of calling funds from investors on an as-needed basis, including for investments, management fees and organisational or partnership expenses. IMG_8026.HEIC

Suppose the €1 billion fund requires:

• €95 million for an acquisition;
• €2 million for transaction expenses;
• €2 million for management fees; and
• €1 million for other fund expenses.

The fund might call €100 million.

If everything is allocated according to commitment:

After funding, LP A has contributed €30 million and has €270 million of its original commitment remaining.

At its simplest:

\[ Remaining\ Commitment = Commitment - Drawdowns \]

But this equation will shortly need modification.

6. What can be drawn?

A capital call is not necessarily synonymous with an investment.

Funds require money for many purposes.

Calls can include amounts for:

• portfolio investments;
• follow-on investments;
• management fees;
• organisational expenses;
• operating expenses;
• broken-deal expenses;
• professional fees;
• taxes;
• indemnities;
• debt repayment;
• fund-level facilities;
• reserves;
• and other permitted purposes.

This distinction becomes extremely important later.

A €10 million contribution used to acquire an investment and a €10 million contribution used to pay management fees are both €10 million cash outflows from investors.

Economically, however, they are not the same thing.

One purchased an asset.

The other paid an expense.

Depending upon the waterfall, the definition of contributed capital and the provisions of the LPA, they may also be treated differently for carried-interest purposes.

Therefore:

Cash amount alone is insufficient information.

The system needs to know why the cash was called.

7. The drawdown notice

The mechanism through which a call is communicated is normally the drawdown notice or capital-call notice.

The source material identifies the usual core information: the investor's commitment, total amount of the drawdown, investor's share, purpose of the drawdown, payment instructions, due date and issue date. IMG_8027.HEIC

Modern notices will generally also provide information such as:

• fund name;
• investor name;
• commitment;
• cumulative contributions before the call;
• current call;
• cumulative contributions after the call;
• unfunded commitment before the call;
• unfunded commitment after the call;
• breakdown by purpose;
• currency;
• payment date;
• bank details;
• and references to the relevant fund documentation.

For carried-interest work, the breakdown by purpose is particularly valuable.

A notice saying simply:

Please pay €7,428,319

may be sufficient to obtain cash.

It is not sufficient to reconstruct the economics of the fund ten years later.

8. Drawdowns should be thought of as transactions, not merely cash movements

This distinction is fundamental.

Suppose LP A transfers €10 million to the fund.

Operationally:

\[ Cash\ received = €10m \]

But economically the transaction might consist of:

• €8.5m investment;
• €0.8m management fee;
• €0.4m transaction expenses;
• €0.2m organisational expenses;
• €0.1m other costs.

Those components may subsequently behave differently.

Some may form part of investment cost.

Some may reduce NAV immediately.

Some may be recallable if subsequently returned.

Some may count towards a preferred-return base.

Some may not.

Some may be attributable to one investment and others to the fund generally.

A robust private equity accounting system therefore preserves the character of a contribution, not merely its amount.

This is one reason why accounting becomes inseparable from carried-interest calculations.

9. Capital contribution versus investment contribution

It is useful to establish another distinction.

Suppose an LP has contributed €40 million.

That does not necessarily mean it has invested €40 million in portfolio companies.

Perhaps:

\[ €40m = €34m\ investments + €3m\ management\ fees + €2m\ fund\ expenses + €1m\ broken\ deal\ costs \]

For performance analysis, capital-accounting purposes and eventually carried interest, those components may need to remain identifiable.

We can therefore distinguish:

Investor contribution

from

Investor investment allocation

The former describes money moving from LP to fund.

The latter describes how the fund economically used that money.

The two often occur together.

They are not conceptually identical.

10. Commitment accounting is a movement ledger

A useful way to think about commitments is as a ledger rather than a static number.

Start with:

\[ Original\ Commitment = €100m \]

Then record events:

The investor originally promised €100 million.

But after contributing €35 million and subsequently receiving a €5 million amount that is recallable, the fund may again have €70 million available to call.

This leads to one of the most important concepts in private equity capital accounting.

11. Recallable distributions

A distribution does not always permanently reduce the amount that the fund can call from an investor.

Under circumstances permitted by the fund documents, a distribution may be designated as recallable, sometimes described as recyclable or subject to recall.

The source material makes precisely this distinction between permanent distributions and amounts that may subsequently be redrawn, noting that recallable amounts need to be tracked because they can be added back to outstanding commitment. IMG_8053.HEIC

Suppose:

• commitment = €100m;
• contributions to date = €60m;
• remaining commitment = €40m.

The fund sells an investment and distributes €20m to the investor.

If the €20m is permanent:

\[ Remaining\ Commitment = €40m \]

If the entire €20m is recallable:

\[ Available\ Commitment = €40m + €20m = €60m \]

The investor has received cash, but the fund has retained the contractual ability to call that cash again.

12. Why recallability exists

Recallability allows a fund to avoid permanently consuming commitment for cash movements that were never intended to represent final deployment of investor capital.

Examples can include amounts originally drawn for:

• management fees;
• fund expenses;
• temporary investments;
• bridge financing;
• investments realised quickly;
• returned transaction funding;
• or other categories specified in the fund documents.

The precise rules vary substantially between funds.

That is deliberate.

There is no universal economic law stating that every returned euro should restore commitment.

The LPA determines when and to what extent it does.

For now, the conceptual point is sufficient:

A distribution can return cash without permanently returning commitment.

That distinction becomes extremely important when modelling both remaining commitment and carried interest.

13. Recallable is not the same as reinvested

These concepts are sometimes spoken about loosely, but they should be separated.

If €10 million is distributed as recallable, the investors receive €10 million.

The fund may subsequently call that €10 million again.

There have therefore been two actual cash movements:

\[ Fund \rightarrow LP = €10m \]

followed later by:

\[ LP \rightarrow Fund = €10m \]

Reinvestment or recycling may sometimes be implemented differently, including by retaining or reusing proceeds within the fund where permitted.

Economically similar outcomes can therefore arise through different mechanisms.

For carried-interest purposes, this matters because the system needs to know whether cash:

• was distributed;
• remained in the fund;
• restored commitment;
• was subsequently recalled;
• or was deemed to have moved without actually moving.

14. The commitment can therefore have several meanings

By now we can see why a single field labelled Commitment is often insufficient.

For an investor we may need to distinguish:

Original Commitment

Current Commitment

Cumulative Contributions

Cumulative Permanent Contributions

Recallable Amounts

Unfunded Commitment

Available Commitment

Depending upon the fund, one might conceptually express available commitment as:

\[ Available\ Commitment = Current\ Commitment - Relevant\ Contributions + Recallable\ Amounts \]

The exact formula depends on the contractual definitions.

That qualification is important enough to repeat:

There is no universal formula that can replace the LPA.

The purpose of the accounting system is to implement the legal and economic rules contained in that document.

We will therefore return to these definitions in the next chapter.

15. Drawdowns do not always follow original commitment

The simplest allocation rule is:

\[ Investor\ Call = Total\ Call \times \frac{Investor\ Commitment}{Total\ Commitments} \]

But private equity funds quickly become more complicated than that.

Consider four investors:

Each has 25%.

A €40 million investment allocated by commitment would require:

\[ €40m \times 25\% = €10m \]

from each investor.

Now suppose Investor D cannot participate in that particular investment.

The question becomes:

Who funds D's €10 million?

16. Excused investors and opt-outs

There are circumstances in which an investor may not participate in a particular investment.

Terminology varies, and the legal distinction matters. An investor may, for example, be excused, excluded, or in some structures have a contractual opt-out right.

Reasons can include:

• legal restrictions;
• regulatory restrictions;
• tax considerations;
• sanctions;
• internal investment restrictions;
• ESG or policy restrictions;
• religious restrictions;
• jurisdictional restrictions;
• conflicts;
• or specifically negotiated side-letter rights.

We should be careful with terminology.

An investor normally cannot simply decide after signing the fund documents:

“I don't like this investment, so I won't fund it.”

The ability to be excused or opt out must arise from the contractual arrangements.

The LPA chapter will deal with that distinction.

For this chapter, what matters is the economic consequence.

17. An opt-out changes the allocation population

Return to the €40 million investment.

A, B, C and D each have €100 million commitments.

D is excused.

The investment can no longer be allocated:

25% / 25% / 25% / 25%.

If A, B and C are required to absorb D's share equally, the participating population becomes:

\[ €100m + €100m + €100m = €300m \]

Each participating investor represents:

\[ \frac{100}{300}=33.333\% \]

The €40 million investment is therefore allocated:

The investors still have identical fund commitments.

But they no longer have identical participation in the portfolio.

This is a major conceptual break.

18. Commitment percentage and investment percentage can diverge

After an excusal, we may have:

\[ Fund\ Ownership\ Percentage \neq Investment\ Participation\ Percentage \]

That difference can continue throughout the life of the investment.

If A funded 33.333% of Investment X, A may also be entitled to approximately 33.333% of the economic results attributable to Investment X, subject of course to the fund's allocation and waterfall rules.

Therefore a system that merely knows:

A owns 25% of the fund

does not necessarily know how much of Investment X belongs economically to A.

This becomes particularly important in:

• deal-by-deal carry;
• investment-specific waterfalls;
• realised gain allocation;
• loss allocation;
• follow-on investments;
• partial realisations;
• investment-specific expenses;
• and clawback calculations.

19. Excusals also affect remaining commitment

There is a second consequence that is easier to overlook.

After the €40 million investment:

• A has funded €13.333m;
• B has funded €13.333m;
• C has funded €13.333m;
• D has funded €0.

Their remaining commitments are therefore no longer equal.

Ignoring previous activity:

This creates a new problem for the next investment.

Should it again be allocated 25% each?

Or should D contribute more because D has more unused commitment?

That leads us to remaining-commitment allocation.

20. Allocation by remaining commitment

Suppose the next investment also requires €40 million.

If it is allocated according to remaining commitment, the denominator is now:

\[ 86.667+86.667+86.667+100 = €360m \]

D's share is:

\[ \frac{100}{360}=27.778\% \]

A, B and C each represent:

\[ \frac{86.667}{360}=24.074\% \]

The new €40 million call becomes approximately:

D therefore begins to catch up.

This mechanism can gradually rebalance deployment across investors after excusals or other asymmetric events.

21. Commitment allocation and remaining-commitment allocation answer different questions

This distinction deserves emphasis.

Allocation by commitment asks:

What proportion of the fund did each investor originally agree to provide?

Allocation by remaining commitment asks:

What proportion of the capital still available for deployment belongs to each investor now?

Those are not necessarily the same question.

Early in a simple fund they may produce identical percentages.

Later they may not.

The source material itself illustrates this phenomenon: its drawdown example contains excused investors and shows that percentages based on remaining commitment can differ from percentages based on original commitment. IMG_8035.HEIC Its corresponding distribution example then demonstrates that investment-specific sharing percentages may need to follow the original participation in the investment rather than simply reverting to commitment percentages. IMG_8047.HEIC

That is exactly the distinction we need for carried-interest purposes.

22. Different components of one drawdown can use different allocation rules

A capital call may itself contain multiple allocation populations.

Suppose a €20 million call consists of:

• €15m Investment X;
• €2m follow-on Investment Y;
• €2m management fee;
• €1m partnership expenses.

Investor D is excused from Investment X.

Investor B had previously been excused from Investment Y.

Management fees are allocated by commitment.

Partnership expenses are allocated by another agreed rule.

There is therefore no single correct allocation percentage for the €20 million notice.

The system must first break the call into components:

\[ Call = Investment\ X + Investment\ Y + Management\ Fee + Expenses \]

and then allocate each component according to its applicable rule.

Only after that can the components be added together to determine the cash payable by each investor.

This is a crucial principle:

Allocation should occur before aggregation.

23. The same principle applies to distributions

Suppose a fund receives:

• €50m from selling Investment X;
• €4m dividend from Investment Y;
• €1m interest;
• €2m refund of expenses.

It would be dangerous simply to aggregate the €57 million and allocate it by commitment.

Investment X may have one participation population.

Investment Y may have another.

The expense refund may need to follow the investors who originally funded the expense.

Interest may be a fund-level item.

Therefore:

\[ Distribution = \sum Individual\ Economic\ Components \]

Each component should first be characterised and allocated.

Only then should the investor's total distribution be determined.

This concept will later become indispensable when we calculate carried interest.

24. Multiple currencies introduce another dimension

Many private equity funds operate across several currencies.

A fund may have a reporting currency of EUR while:

• one investor commits in EUR;
• another investor commits in USD;
• an investment is acquired in GBP;
• another investment is acquired in SEK;
• and disposal proceeds are received in USD.

This creates several separate questions.

What currency is the investor's commitment measured in?

What currency is the drawdown notice issued in?

What amount of commitment is consumed?

At what exchange rate?

What happens if the acquisition ultimately requires more or less currency than anticipated?

How are foreign-exchange gains and losses treated?

And, ultimately:

Which currency history is relevant for the carried-interest calculation?

25. Commitment currency and transaction currency are not necessarily the same

Suppose an investor has a:

\[ €100m \]

commitment.

The fund makes a USD investment requiring that investor to fund:

\[ \$11m \]

Assume the applicable exchange rate is:

\[ EUR/USD = 1.10 \]

The call consumes:

\[ \$11m / 1.10 = €10m \]

of commitment.

Remaining commitment becomes:

\[ €100m - €10m = €90m \]

But suppose the euro weakens before the investment is sold.

The eventual USD proceeds translated back into EUR may produce an economic result that differs materially from the investment's local-currency result.

Private equity systems therefore often need to retain multiple currency views simultaneously.

26. Currency should not be overwritten

A dangerous approach is to convert everything into the fund currency and discard the original amounts.

Instead, a robust record should preserve, where relevant:

• transaction currency;
• transaction-currency amount;
• commitment currency;
• commitment-currency equivalent;
• fund/reporting currency;
• reporting-currency equivalent;
• exchange rate;
• exchange-rate date;
• and exchange-rate source or convention.

For example:

Why retain all of this?

Because ten years later someone may need to explain why the investor's remaining commitment moved by €10 million when the underlying investment ledger shows $11 million.

And carried-interest calculations frequently require exactly this type of reconstruction.

27. Multi-currency funds can produce counter-intuitive remaining commitments

Suppose a fund estimates that it needs $11 million and calls €10 million at 1.10.

By settlement, the exchange rate changes.

Perhaps the fund now needs €10.2 million to purchase the required dollars.

Or perhaps only €9.8 million is required.

What happens to the difference?

Depending on the fund arrangements it may be:

• retained for another permitted purpose;
• returned;
• offset against a future call;
• treated as an FX movement;
• or otherwise adjusted.

The important lesson is not that there is one universal treatment.

It is that:

Currency conversion itself can become a commitment movement.

Therefore multi-currency capital accounting cannot safely be reduced to a single translated cash ledger.

28. Dry calls

Not every call recorded in a private equity system necessarily represents a fresh transfer of cash.

The expression dry call is used somewhat differently across managers, administrators and software platforms, so its precise meaning should always be established in context.

Generally, however, it refers to a call or contribution event that is recorded for allocation, commitment or capital-account purposes without requiring the corresponding investor to send new cash at that moment.

This can arise in connection with:

• netting;
• recycling;
• deemed contributions;
• equalisation;
• reallocation;
• reinvestment mechanics;
• or other non-cash capital-account movements.

Conceptually:

\[ Contribution\ Event \neq Cash\ Receipt \]

That distinction is extremely important.

29. A simple dry-call example

Suppose an investor is entitled to a €5 million distribution.

At the same time, the fund requires a €3 million capital contribution.

Instead of:

1. paying €5 million to the investor; and
2. asking the investor to return €3 million,

the fund may, where permitted, settle only the difference:

\[ €5m - €3m = €2m \]

Cash paid:

\[ €2m \]

But the economic records may still need to reflect:

\[ Distribution = €5m \]

and

\[ Contribution = €3m \]

The €3 million contribution can therefore exist as an economic capital event even though the investor did not separately transfer €3 million.

This is precisely why cash accounting alone cannot support carried-interest calculations.

30. Dry distributions

The inverse concept can also arise: a dry distribution.

Again, terminology varies by fund and administrator.

Broadly, it describes a distribution event recognised in the economic or capital records without a corresponding cash payment being made to the investor at that moment.

This can occur in structures involving:

• deemed distributions;
• reinvestment;
• netting;
• withholding;
• capital-account reallocations;
• equalisation;
• or other contractual mechanics.

Conceptually:

\[ Distribution\ Event \neq Cash\ Payment \]

This distinction becomes especially important when a waterfall depends upon amounts deemed distributed rather than merely cash physically received.

31. Netting must not destroy the gross history

Suppose:

\[ Gross\ Distribution = €8m \]

and:

\[ Gross\ Drawdown = €5m \]

Cash transferred to the LP is only:

\[ €3m \]

If the accounting system records only:

Distribution €3m

it has destroyed information.

Economically there were two events:

\[ Distribution = €8m \]\[ Contribution = €5m \]\[ Net\ Cash = €3m \]

The source material makes the same operational point: even where drawdowns and distributions are netted, the drawdown and distribution elements should remain separately stated and separately accounted for. IMG_8048.HEIC

For carried interest, this principle is essential.

Net settlement must not become net economic accounting.

32. Contributions and distributions therefore exist on two layers

We can now distinguish:

Economic layer

What happened to the investor's rights, obligations and participation?

Cash layer

What actually moved through the bank?

Often:

\[ Economic\ Event = Cash\ Event \]

But not always.

Dry calls, dry distributions, netting, withholding and reinvestment demonstrate why a private equity system must preserve both.

A carried-interest model generally operates primarily from the economic history, while cash dates and cash amounts remain essential for such matters as preferred return and IRR.

33. Distribution is more than cash coming back

A distribution is usually described as money or property transferred from the fund to investors.

The source material distinguishes distributions arising from realised investment proceeds and investment income, and then separates return of capital, income distributions and capital distributions. IMG_8041.HEIC

For our purposes, a more useful question is:

What does the distribution represent economically?

A distribution might contain:

• return of invested capital;
• realised gain;
• dividend income;
• interest income;
• expense reimbursement;
• return of unused capital;
• recallable proceeds;
• preferred return;
• carried interest;
• tax-related amounts;
• or other items.

Again:

€10 million of cash is not enough information.

We need to know what the €10 million is.

34. Return of capital and profit are fundamentally different

Suppose an investment cost €20 million and is sold for €30 million.

At the most elementary level:

\[ Proceeds = €30m \]

consisting of:

\[ Return\ of\ Cost = €20m \]

and:

\[ Gain = €10m \]

This distinction becomes central to the waterfall.

A typical carried-interest structure does not simply say:

GP receives 20% of every euro distributed.

Instead, capital may first need to be returned to LPs.

A preferred return may then need to be satisfied.

Catch-up may follow.

Only thereafter may residual proceeds be split between LPs and the carried-interest participants.

Therefore the classification of distribution proceeds is not merely an accounting exercise.

It helps determine where the money sits in the waterfall.

35. Distribution allocation may follow investment participation

Suppose Investment X was funded:

• A: 40%;
• B: 30%;
• C: 20%;
• D: 10%.

If Investment X is sold for €50 million, the starting point may be to allocate those proceeds according to those investment-sharing percentages:

It would normally make little economic sense to distribute those proceeds according to current fund commitment percentages if those percentages differ materially from the way the investment was funded.

This gives us an important matching principle:

\[ Investment\ Allocation \longleftrightarrow Investment\ Proceeds\ Allocation \]

The source book's excused-investor distribution example illustrates exactly this issue by carrying investment-specific sharing percentages into the distribution calculation. IMG_8047.HEIC

36. The source of a distribution therefore matters

A distribution should ideally retain a link to its source.

For example:

Distribution 27

may contain:

• €42m — partial sale of Investment A;
• €8m — dividend from Investment B;
• €3m — interest from Investment C;
• €2m — expense refund;
• €1m — excess cash.

Each component may have:

• a different allocation population;
• different sharing percentages;
• different recallability;
• different tax treatment;
• different carry treatment;
• and a different effect on remaining commitment.

That lineage is enormously valuable when the carried-interest model is subsequently built.

37. Distribution notices

Like drawdowns, distributions are normally communicated through formal notices.

The source material describes distribution notices as advance communications stating the amount to be distributed, the distribution date, bank details and usually the source of the distribution. IMG_8043.HEIC

A useful distribution notice can include:

• investor;
• distribution date;
• total fund distribution;
• investor's allocation;
• source investment;
• return of capital;
• gain;
• income;
• recallable amount;
• permanent amount;
• cumulative distributions;
• remaining commitment before distribution;
• remaining commitment after distribution;
• withholding;
• carried-interest allocation where applicable;
• and net cash payable.

Again, the notice is not merely a payment instruction.

It is part of the audit trail of the investor's economic history.

38. Distribution timing matters

A private equity fund should not unnecessarily retain cash that belongs to investors.

Cash sitting in the fund can reduce investor returns, particularly IRR.

If an investment is sold today but proceeds are distributed months later, the investor's realised economics can deteriorate even though the nominal profit is unchanged.

This is another manifestation of the principle introduced earlier:

\[ Return = Amount + Time \]

The source material likewise notes that realised capital proceeds are generally distributed when practicable and that delaying them can negatively affect IRR. IMG_8042.HEIC

Distribution timing therefore matters operationally and economically.

Later it will also matter to preferred-return calculations.

39. The fund may nevertheless retain cash

Immediate distribution is not always appropriate.

The fund may need liquidity for:

• liabilities;
• expenses;
• indemnities;
• taxes;
• follow-on investments;
• reserves;
• debt;
• potential clawback exposure;
• or other obligations.

Consequently:

\[ Cash\ Realised \neq Cash\ Immediately\ Distributable \]

This distinction becomes especially important late in a fund's life, when apparently distributable cash may need to be balanced against remaining liabilities and potential carried-interest clawback.

40. Distributions in specie

Not every distribution consists of cash.

A fund may under permitted circumstances distribute securities or other assets in specie.

The source material identifies this possibility and notes the need to determine fair value and follow the procedures prescribed by the fund documents. IMG_8052.HEIC

For carried-interest purposes, this creates an obvious issue.

If an LP receives shares worth €10 million rather than €10 million cash:

\[ Value\ Distributed = €10m \]

but:

\[ Cash\ Distributed = €0 \]

The waterfall therefore needs a valuation convention.

The accounting system needs to preserve:

• the asset;
• quantity;
• valuation;
• valuation date;
• investor allocation;
• and subsequent treatment where relevant.

Again, economic distribution and cash movement are not synonymous.

41. Permanent versus temporary distributions

One of the most useful classifications is:

Permanent distribution

The amount has been returned to the investor and cannot ordinarily be called again merely because it was distributed.

Recallable distribution

The amount has been returned but remains subject to recall under the fund documents.

Suppose an LP receives €12 million:

• €8m permanent;
• €4m recallable.

Then:

\[ Cash\ Distribution = €12m \]

but the effect on available commitment is not €12 million.

Only the €4 million recallable component potentially restores callable capacity.

This is why the distribution record should preserve both components separately.

42. The history can become surprisingly complicated

Consider an investor with a €100 million commitment.

During the fund's life:

1. €20m is called for Investment A.
2. €5m is called for fees and expenses.
3. €15m is called for Investment B.
4. €8m is distributed from Investment A.
5. €3m of that distribution is recallable.
6. €10m is called for Investment C.
7. €3m of that call is satisfied by recalling the previous distribution.
8. €6m is distributed from Investment B.
9. €2m is simultaneously required for a follow-on investment and is netted against the distribution.
10. Part of Investment C is denominated in USD.

Looking only at bank movements no longer tells us:

• how much has been contributed;
• how much commitment has been consumed;
• how much remains available;
• which investments the LP owns;
• what has been returned;
• what was recallable;
• what was recalled;
• or what will eventually enter the carry calculation.

This is why private equity capital accounting is fundamentally transactional and historical.

43. The capital account is an economic memory

Traditional accounting asks questions such as:

What are the assets and liabilities of the fund?

For carried interest we need additional questions:

Who funded the asset?

Under which allocation rule?

Was anyone excused?

What commitment did the contribution consume?

Was any amount subsequently returned?

Was it recallable?

Was it recalled?

Which investor received the gain?

When was each amount contributed and distributed?

In which currency?

At which exchange rate?

This is why the investor capital records can be thought of as the economic memory of the fund.

Without that memory, carried interest becomes extraordinarily difficult to reconstruct.

44. Accounting classifications still matter

Although this chapter is intentionally not an accounting manual, accounting cannot be ignored.

The source material spends considerable time distinguishing capital and loan contributions, partners' accounts, income and capital accounts, and financial-statement presentation. It also illustrates how drawdowns affect call receivables, cash, investments and investor accounts. IMG_8036.HEIC

For our purposes, the deeper lesson is more important than the journal entries:

The accounting structure should preserve the distinctions that the economics and the LPA require.

If management fees, investment contributions, expenses, recallable amounts, gains and income are all collapsed into a single undifferentiated balance, a later carried-interest calculation may require the entire history to be reconstructed.

Good accounting makes that reconstruction unnecessary.

45. Carried interest requires more detail than the general ledger may provide

A perfectly valid financial statement may show:

\[ Partners'\ Capital = €742m \]

That tells us almost nothing about the information required for carry.

We may instead need:

• capital contributed by investor;
• capital contributed by investment;
• contribution dates;
• contribution purpose;
• distributions by investor;
• distributions by investment;
• realised gains;
• income;
• recallability;
• preferred-return balances;
• investment participation percentages;
• realised and unrealised value;
• carry already distributed;
• and potential clawback.

This is why carried-interest systems frequently sit alongside the general ledger rather than simply reproduce it.

The GL answers:

What has been accounted for?

The carry model asks:

Who is economically entitled to what, under the contractual waterfall?

They must reconcile.

They are not the same thing.

46. A useful three-ledger way of thinking

For carried-interest purposes, it is useful conceptually to imagine three connected histories.

Cash history

What physically moved?

Commitment history

What happened to each investor's callable obligation?

Economic allocation history

Who economically participated in each investment, expense, income item, gain and loss?

A fourth layer will shortly be added:

Waterfall history

How do those economic amounts affect the priority of distributions between LPs and carry participants?

A robust model connects all four.

\[ Cash \leftrightarrow Commitment \leftrightarrow Allocation \leftrightarrow Waterfall \]

That is the architecture underlying carried interest.

47. Why transaction dates must be retained

Amounts alone are insufficient.

Suppose two investors each contribute €10 million and each ultimately receive €15 million.

Investor A contributes on 1 January 2027.

Investor B contributes on 1 January 2029.

Both receive €15 million on 1 January 2030.

Their multiples are identical:

\[ MOIC = 1.5x \]

Their time-weighted economics are not.

If the preferred return compounds with time, their waterfall positions may also differ.

Every economically relevant event therefore needs both:

\[ Amount \]

and

\[ Date \]

Frequently it also needs:

\[ Currency \]

and:

\[ Purpose \]

and:

\[ Allocation\ Source \]

This begins to show why carried-interest calculations become data-intensive.

48. Carried interest starts long before the first carry distribution

It is tempting to think that carried interest becomes relevant only when the fund becomes profitable enough to pay carry.

That is incorrect.

The data needed to calculate carry starts accumulating with the first commitment and the first drawdown.

By the time the fund reaches the carry point, the model may need to know years of:

• contributions;
• distributions;
• recallable amounts;
• investment allocations;
• realised proceeds;
• expenses;
• dates;
• currencies;
• and investor-specific exceptions.

The source material recognises this when it warns that distributions at the carry point require additional controls and that excessive carried interest may ultimately be subject to clawback. IMG_8053.HEIC

The practical lesson is broader:

You cannot build an accurate carried-interest history retrospectively from summary balances if the underlying transaction history has been lost.

49. Whole-of-fund carry makes the capital history central

Under a whole-of-fund or European-style waterfall, carried interest generally does not become distributable until specified fund-level priorities have been satisfied.

Without yet entering into the detailed waterfall, these may include concepts such as:

\[ Return\ of\ Relevant\ Contributions \]

followed by:

\[ Preferred\ Return \]

followed potentially by:

\[ Catch\text{-}up \]

and then:

\[ Residual\ Profit\ Split \]

Immediately we encounter questions created by this chapter.

What counts as a contribution that must be returned?

Do management fees count?

Do expenses count?

How are recallable distributions treated?

What happens to a dry contribution?

What is the relevant date?

How are different currencies converted?

These are not peripheral accounting questions.

They determine the waterfall.

50. Deal-by-deal carry makes investment lineage central

Under a deal-by-deal waterfall, another dimension becomes especially important:

Which capital belongs to which investment?

Suppose Investment A generates a €50 million gain while Investment B has an unrealised €30 million loss.

Whether carry can be distributed from Investment A—and how much—depends upon the waterfall.

But even before applying that waterfall, the system must know:

• who participated in A;
• how much they contributed;
• which expenses belong to A;
• what proceeds A generated;
• whether A was partially realised before;
• and what carry has already been allocated in respect of A.

An investor excused from Investment A should not suddenly acquire its economics simply because the investor has the same fund commitment as someone who participated.

Thus:

\[ Fund\ Commitment\ History \]

is not sufficient.

We also need:

\[ Investment\ Participation\ History \]

51. The carry participant may itself contribute capital

The carried-interest participant is not necessarily merely a recipient of future profits.

Depending upon the structure, GP entities, executives or carried-interest vehicles may themselves invest capital.

The source material notes, for example, structures in which the carried-interest partner contributes capital so that a required proportion between LP and carry-participant capital is maintained. IMG_8031.HEIC

That creates an important distinction later:

A person may receive money:

as an investor

and also:

as a carried-interest participant.

Those capacities must not be confused.

If a GP has invested 1% of fund capital, its 1% investment return is not itself carried interest.

The same legal entity can therefore have multiple economic roles.

52. Distributions can likewise have multiple capacities

Imagine the GP receives €3 million.

That amount might comprise:

• €0.5m return of GP investment;
• €0.3m profit on GP investment;
• €2.2m carried interest.

The bank statement says:

\[ €3m \]

The economics say something very different.

This is another example of the central theme:

Cash recipient does not determine economic character.

The records must distinguish the capacity in which an amount is received.

That distinction will become especially important when we build the carry waterfall.

53. Final distributions do not necessarily mean the calculation is finished

Towards the end of a fund's life, substantially all investments may have been realised and the remaining cash distributed.

But the carry analysis may still need to consider:

• final expenses;
• contingent liabilities;
• escrow proceeds;
• indemnities;
• tax adjustments;
• late receipts;
• true-ups;
• clawback;
• and final allocations.

The source material specifically highlights final verification and the need to test whether excessive carried interest has been paid and is therefore subject to clawback. IMG_8053.HEIC

Thus the final distribution is not merely:

Empty the bank account.

It is the final reconciliation of the economic history of the fund.

54. One euro can have a surprisingly long history

Consider a single euro committed by an LP.

It may begin as:

\[ €1\ Commitment \]

then become:

\[ €1\ Drawdown \]

then:

\[ €1\ Investment\ Cost \]

The investment may generate:

\[ €1.60\ Proceeds \]

of which:

\[ €1.00 = Return\ of\ Capital \]

and:

\[ €0.60 = Profit \]

Part of the €1 may be recallable.

It may subsequently be called again and invested into another asset.

The €0.60 profit may enter a waterfall.

Part may satisfy preferred return.

Part may enter catch-up.

Part may ultimately be split between LP and carry participant.

One original euro of commitment can therefore create a chain of economic events extending across the entire life of the fund.

Carried interest is ultimately the contractual allocation of the results of that chain.

55. The complete capital cycle

We can now expand the simple private equity cycle introduced at the beginning.

It is not merely:

\[ Commitment \rightarrow Drawdown \rightarrow Distribution \]

It is closer to:

\[ Commitment \]\[ \downarrow \]\[ Available\ Commitment \]\[ \downarrow \]\[ Drawdown \]\[ \downarrow \]\[ Allocation\ by\ Purpose \]\[ \downarrow \]\[ Allocation\ by\ Investor \]\[ \downarrow \]\[ Investment \]\[ \downarrow \]\[ Income / Gain / Loss \]\[ \downarrow \]\[ Realisation \]\[ \downarrow \]\[ Distribution\ Allocation \]\[ \downarrow \]\[ Permanent\ or\ Recallable \]\[ \downarrow \]\[ Potential\ Recall \]\[ \downarrow \]\[ Further\ Drawdown \]

At the same time, a second process runs alongside it:

\[ Contribution + Time + Return + Profit \]\[ \downarrow \]\[ Waterfall \]\[ \downarrow \]\[ LP\ Distribution + Carried\ Interest \]

This is the bridge between fund accounting and carried interest.

56. The data model behind carried interest

Without becoming overly technical, we can now identify the minimum conceptual information that a carried-interest calculation may eventually require for each transaction:

For a distribution we may additionally need:

This is why sophisticated carried-interest work is fundamentally a data-lineage exercise.

The calculation is only as reliable as the history feeding it.

57. A reconciliation should always be possible

However complicated the fund becomes, several fundamental relationships should remain explainable.

At investor level:

\[ Original\ Commitment \]

must reconcile through:

\[ Commitment\ Changes \]\[ Contributions \]\[ Recallable\ Amounts \]

and:

\[ Remaining\ Commitment \]

Cash should reconcile independently through:

\[ Opening\ Cash + Receipts - Payments = Closing\ Cash \]

Investment records should reconcile:

\[ Investment\ Cost + Additional\ Investment - Cost\ Realised = Remaining\ Cost \]

And distributions should reconcile:

\[ Gross\ Proceeds = LP\ Allocations + GP/Carry\ Allocations + Other\ Permitted\ Amounts \]

The precise equations vary according to the structure.

The principle does not:

Every number in a carried-interest model should be capable of being traced backwards to the economic events that created it.

58. Why this matters for the Carried Interest Bible

At first glance, commitments, capital calls and distributions might appear to belong in a fund-accounting textbook rather than a book about carried interest.

The opposite is true.

They are the raw materials of carried interest.

Carried interest cannot be understood solely by learning a formula such as:

\[ 20\%\ of\ profits \]

because before we can determine the profit to which 20% might apply, we have to know:

• what capital was committed;
• what capital was contributed;
• when it was contributed;
• why it was contributed;
• which investment it funded;
• who participated;
• which investors were excused;
• what happened to their remaining commitments;
• what was realised;
• how proceeds were allocated;
• what was returned as capital;
• what represented profit;
• what was recallable;
• what was subsequently recalled;
• what was netted;
• what happened without cash;
• and how currencies were translated.

Only then can we ask:

How should the resulting economic profit be divided between the LPs and the carried-interest participants?

That is why accounting matters.

Not because carried interest is an accounting concept.

It is not.

Carried interest is fundamentally a contractual economic allocation.

But the contract operates upon a history of economic events, and accounting is the mechanism through which that history is recorded, classified, reconciled and ultimately made calculable.

59. And all of this depends upon one document

Throughout this chapter we have repeatedly used phrases such as:

• “where permitted”;
• “depending upon the fund”;
• “under the applicable allocation rule”;
• “if recallable”;
• “subject to the waterfall”;
• “where an investor is excused”;
• and “depending upon the contractual definition.”

That is not accidental.

Private equity does not have one universal rulebook saying that every fund must allocate a particular expense in the same manner, permit the same recycling, define contributed capital identically or calculate every waterfall using the same definitions.

The rules are principally contractual.

At the centre of those contractual arrangements sits the Limited Partnership Agreement.

The LPA determines the architecture within which commitments, drawdowns, distributions, allocations, recallability, investor rights and ultimately carried interest operate.

Before we can properly build the carried-interest waterfall, we therefore need to understand how to read the document that defines its rules.

That is the subject of the next chapter:

Part IV — The Limited Partnership Agreement

And once we understand the LPA, we can move from merely recording the economic history of the fund to answering the question at the heart of this book:

Who is entitled to the profits, in what order, and when?

Need assistance with your Carried Interest Challenges? Reach out to us:

[email protected]

The Carried Interest Bible © 2026 Table Bay Investments Ltd, All rights reserved.