Capital Jeopardy

Capital Excel Tips

100

What EY add on is important to download onto your Excel for quick audit shortcuts?

"Audit Tools"

200

What tab can a preparer look for the "New Window" option?

View Window 

300

What can we do prior to setting up funds to ensure quick preperation?

Create a template based on one fund, specific to your client to minimize rework.

400

What excel shortcut can take you directly to the cell where the formula is being performed?

Ctrl + [

500

What excel shortcut is used to fence tabs?

Ctrl + Shift + F

Structure Knowledge

100

What's a Side Letter?

Side letters are commonly used in investment transactions, such as private equity or venture capital deals, where investors may negotiate certain rights or privileges that are not included in the standard terms of the investment agreement (LPA/PPM).

200

What's a Hurdle Rate?

The lowest amount of profit or return a fund must earn to charge a performance fee (incentive fee). This rate is either fixed (e.g., 8% return) or a benchmark rate (e.g., S&P 500 Index, SOFR, etc.).

300

If looking into the Financial Statements, where can one look for the changes in capital accounts?

PCAP

400

What's the main difference between a private equity fund and a RIC?

Regulated Investment Company (RIC) Funds

• Structure: Typically mutual funds, ETFs, or closed-end funds.
• Regulation: Governed by the Investment Company Act of 1940 and must meet IRS requirements under Subchapter M of the Internal Revenue Code.
• Tax Treatment: Pass-through entity — avoids corporate income tax if it distributes at least 90% of its income to shareholders.
• Liquidity: Highly liquid; shares can be bought/sold daily on public exchanges.
• Investor Access: Available to the general public; low minimum investment.

Private Equity (PE) Funds

• Structure: Limited partnerships; investors are limited partners, and the fund manager is the general partner.
• Regulation: Less regulated; not subject to the Investment Company Act of 1940.
• Tax Treatment: Also pass-through entities, but structured differently (often using partnerships).
• Liquidity: Illiquid; capital is locked up for years (usually 7–10 years).
• Investor Access: Restricted to accredited investors or institutions; high minimum investment.

500

What is an Open Ended Fund?

An open-ended fund is a type of investment vehicle that allows investors to continuously buy and redeem shares directly from the fund at its net asset value (NAV), which is calculated daily based on the total value of its underlying assets. Unlike closed-ended funds, open-ended funds do not have a fixed number of shares and can expand or contract in size depending on investor demand, offering high liquidity and flexibility for both individual and institutional investors.  

Allocation

100

Define Capital Allocation

Process of allocating the profit/loss to the respective investors in accordance with their ownership standing in the fund. This is usually laid out in the LPA/OM. P&L will typically be allocated by investor commitment, capital balance or contributed capital.

200

What file do we need from the CST/Client provide for us to test allocation?

The Partner Capital (PCAP), which refers to the partners’ net invested capital and returns on its investment. Incorporates three components: Capital Contributions, Capital distributions and income/loss allocation.

300

What is pro-rata allocation?

Pro-rata allocation in the context of a fund's Profit and Loss (P&L) statement refers to the method of distributing profits and losses among investors based on their proportional ownership or investment in the fund.

400

What is SAP, and why is it important to us in the allocation testing?

Substantive Analytical Procedures (SAP): Analytical procedures designed and performed, either alone or in combination with tests of details, as substantive procedures. SAP is performed on P&L, management fees and performance fees (incentive fees) based on our understanding of the provisions of the legal documents and fund structure

500

When looking at the SUMPRODUCT formula below, what would column Z:Z represent?

=SUMPRODUCT(SUMIFS(INDIRECT("'"&$C48&"'!$Z:$Z"),INDIRECT("'"&$C48&"'!$K:$K"),$B48))

Column Z:Z represents the information we're looking to bring in our SAP-allocation tab while K:K is what we're referencing to get this data.

Activity

100

Define Capital Activity

Refers to the capital movements (subscription/contribution, redemptions/withdrawals, switches and transfers) in/out of the fund.

200

What file do we look for when bringing in the terms?

LPA (Limited Partnership Agreement)

300

For commitment testing, what threshold do we use to scope material line items?

PM (Planning Materality)

400

When running smart sampling for capital activity, what OSP do we select and why?

Some 

Given capital activity flows through the funds' cash accounts, and we performed substantive testing procedures on these accounts such as cash and cash cutoff testing as well as reviewed detail general ledger activity in search for unusual activity in these cash accounts in the TB.

500

What can we look for in a fund to know whether we are testing shares?

LTD and/or financials stating shares.

LCFHWM

100

Define LCF (Loss Carry Forward)

 Refers to the losses that needs to be recouped before the investment manager is entitled to a performance fee.

200

What months do we select for HWMLCF testing?

First, Last, and month with the most activity.

300

What are crystallized performance fees?

Crystallized performance fees: Performance fees paid to the Investment manager that have been formally recognized or "crystallized" at a specific point in time.

 These fees are typically calculated as a percentage of the profits generated by the fund above a certain benchmark or hurdle rate.

400

What is the difference between Loss Carried Forward and Highwater Mark?

Loss Carried Forward

• Definition: A mechanism that allows a fund to carry forward losses from previous periods to offset future gains before calculating performance fees.
• Purpose: Ensures that fund managers don’t earn performance fees until past losses are recovered.
• Application: Common in hedge funds and some private investment structures.
• Investor Protection: Protects investors from paying performance fees when the fund hasn’t truly gained overall.
• Example: If a fund loses 10% in Year 1 and gains 15% in Year 2, performance fees are only calculated on the 5% net gain.

High Water Mark

• Definition: The highest peak in value that a fund has reached; performance fees are only charged on gains above this level.
• Purpose: Prevents fund managers from earning performance fees on gains that merely recover previous losses.
• Application: Widely used in hedge funds and private equity.
• Investor Protection: Ensures fees are only paid when the fund exceeds its previous highest value.

500

Describe a Waterfall Model

Model used to compute distributions and capital accounts in a private equity structured fund. When realized proceeds are distributed, model is used to determine percentage distributed to LPs and GP. When quarterly capital accounts are issued, model is used to determine percentage of unrealized gain/loss allocable to LPs and GP.