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How to Handle Private Equity Fund Investments


Handling Private Equity Fund Investments

Question: I have three investments in private equity funds that only pay out when each company in the fund exits via a sale or an initial public offering (IPO). So, it's very unpredictable, and I'm not sure how to handle this in the tool. Should I categorize them as deposits, joint savings, or something else? I've entered them as non-registered investments, lump sum, but I'm not sure that's the right choice.

  • Three Funds:

  • Fund 1: Expected lifespan of 10-12 years

  • Start: 2013

  • End: 2023-2025

  • Amount: $286,000 CAD (Paul)

  • Description: This one should be paying out over the next couple of years

  • Fund 2: Expected lifespan of 10 years

  • Start: 2016

  • End: 2026

  • Amount: $141,000 USD (Liz)

  • Description: Currently midway through and assuming a 15% return annually over the next five years.

  • Fund 3: Expected lifespan of 10 years

  • Start: 2018

  • End: 2028

  • Amount: $102,000 USD (Paul)

  • Description: Early stage and not much is expected until 2025, assuming a 15% return over the next seven years.

Answer:I would categorize these as lump sums at the ages when the client wants to illustrate exiting the positions, using future dollars. For instance, if a position is expected to close in five years with a 15% annual return, the $141,000 USD would increase to $283,000 USD ($141,000 * 1.15^5), and this amount should be entered at her current age plus five years.

This approach will accurately model the 15% return for these specific funds and their expected availability dates.

The tool will automatically populate Tax-Free Savings Accounts (TFSA) and then Joint Non-Registered deposits, making it more accurate than a non-registered lump sum where returns are limited to 4-7%. It's essential to convert the two US funds to Canadian dollars.

Gradual payouts aren't a concern unless specifically requested. In that case, break them into multiple lump sum deposits, although this involves complex calculations and would be hard to manage if the plan changes.

Keywords:Private Equity Funds, Lump Sum Investments, Return on Investment, Currency Conversion


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