Side Pocket - Segregation of Illiquid / Special Asset
Recording the transfer of a portfolio investment into a side pocket structure to ring-fence an illiquid or hard-to-value asset from the main fund's liquid portfolio, preventing unfair dilution for incoming and exiting investors.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Side Pocket Investment - Portfolio Company H | Asset (+) | 2,500,000.00 | - |
| Investments at Fair Value - Main Portfolio | Asset (-) | - | 2,500,000.00 |
💡 Accountant's Note
Side pockets are more common in hedge funds but used in some PE structures when a specific investment becomes illiquid, enters distress, or involves a restructuring that makes fair valuation difficult. The asset is moved to a separate sub-account (side pocket) with restricted liquidity. Only LPs invested at the time of the side pocket designation participate in that investment's economics.
Practitioner & Systems Framework
💻 ERP Architecture
Create a separate series or sub-ledger for the side pocket in the fund accounting system. Existing LP interests are bifurcated into main fund interests and side pocket interests. New investors do not participate in the side pocket. All future income, expenses, and gains/losses are tracked separately.
⚠️ Audit Flags
Auditors scrutinize the valuation of side pocket assets heavily (by definition they are hard to value). The fairness of the side pocket designation (which LPs are included/excluded) and the methodology used for valuation require detailed documentation.
📄 Required Documentation
Investment committee memo authorizing side pocket designation, LPA side pocket provisions or investor consent, valuation policy for the specific asset, LP notification of side pocket creation.
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