What Is the Difference Between Private Debt and Equity Accounting?

Published date:  20 March 2025   |  5-Min Read

In private markets, fund managers and allocators often navigate both equity and credit strategies. While they may coexist under the same fund family or portfolio, the accounting treatment for private debt and equity differs significantly especially in how income is recognized, how risk is measured, and how fund performance is reported. 

Understanding these differences is critical for fund managers, accountants, and administrators overseeing complex, illiquid portfolios. 

This blog explores the core distinctions between private debt and equity accounting, the instruments involved, and how reporting evolves in hybrid fund structures. 

Both PE and VC funds adhere to fair value accounting, typically governed by IFRS or US GAAP. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants. 

Since private assets are illiquid and not traded on public markets, mark-to-market becomes a challenge. Fund accountants must use estimation techniques, supported by internal models and external benchmarks, to value portfolio assets at each reporting period. 

The International Private Equity and Venture Capital Valuation (IPEV) guidelines serve as the prevailing industry standard, providing a framework for fair value estimation in alternative asset funds. 

This is the most fundamental accounting distinction: 

• Private Debt Funds recognize income periodically as interest accrues or is received. Interest may be fixed, floating, or payment-in-kind (PIK). 

• Private Equity Funds typically defer income recognition until a liquidity event occurs (e.g., an exit or recap), resulting in realized capital gains. 

Accounting teams must also track: 

• Accrued interest for debt that pays less frequently 

• Fee amortization from arrangement, commitment, or prepayment fees 

• Unrealized gains/losses for equity marked to fair value 

Accounting treatments also reflect the liquidity and risk profile of each asset: 

• Private Debt is generally more predictable and amortizing, with set repayment schedules. However, defaults or restructuring can complicate accounting. 

• Private Equity is illiquid, long-term, and value is often based on assumptions or modeling rather than cash flows. 

This affects: 

• NAV stability: Private debt often provides smoother NAV profiles, while equity NAVs fluctuate with market sentiment and valuation inputs. 

• Provisioning: Debt may require impairment reserves or expected credit loss models, especially under IFRS 9. 

• Performance metrics: Debt funds use yield-to-maturity or IRR, while equity funds focus on MOIC and TVPI. 

Private debt covers a range of structured instruments, each with unique accounting needs: 

• Direct Lending: Typically floating-rate loans to middle-market companies, often with covenants and collateral. 

• Mezzanine Debt: Subordinated, higher-yield loans with equity-like upside (e.g., warrants). 

• Unitranche Financing: Combines senior and subordinated debt in one facility. 

• Convertible Notes: Hybrid instruments that start as debt and may convert into equity, requiring dual tracking. 

Fund accountants must track interest schedules, amortizations, prepayments, and potential conversion events. Multi-instrument portfolios require integrated systems to avoid errors in revenue recognition and valuation. 

Fund administrators supporting private debt and equity funds must tailor their systems and workflows to asset type: 

• Debt Funds: Track interest accruals, loan covenants, maturity schedules, and impairments. 

• Equity Funds: Focus on valuation inputs, market comparables, and capital event tracking. 

• Hybrid Funds: Require dual frameworks, often with parallel accounting treatments for each sleeve. 

Administrators also ensure compliance with: 

• GAAP or IFRS requirements for fair value and income recognition 

• LP reporting standards, including capital account statements and performance metrics 

• Audit support, including documentation of valuation methodology and assumptions 

More funds are blending debt and equity to offer flexible capital solutions, but this creates new accounting complexity: 

• Mixed income streams (interest + capital gains) 

• Dual NAV calculations and share classes 

• Different valuation frequencies and impairment tests 

• Complex fee and carry structures across asset types 

Hybrid fund managers must ensure their back office can support segmented accounting, handle inter-asset allocations, and generate consolidated but accurate investor reporting. 

The line between debt and equity can blur in modern private markets, but from an accounting perspective, the differences are stark. Whether it’s how income is booked, how risk is managed, or how NAV is reported, fund managers must understand the nuances of each asset class and build the right infrastructure to support them. 

As investor demand grows for private credit and multi-asset funds, mastering the fundamentals of private debt vs equity accounting will be key to maintaining transparency, regulatory compliance, and operational efficiency.