A notable percentage of private equity firms are failing to send investors their audited financial statements in a timeframe that meets LPs’ own reporting duties, according to multiple industry sources speaking with PE Manager.
Many institutional investors have an obligation to report portfolio performance numbers to their own fiduciaries. To provide an accurate snapshot of how their private equity investments are faring, LPs rely on fund managers to report the fund’s net asset value based on its fair market value.
“We need these reports on time, and what we’ve been hearing from our GPs is that they’re coming in later than usual because of auditors,” said one US-based LP speaking on the condition of anonymity. “It just all becomes very frustrating.”
According to the LP and others, GPs are crunching more numbers and running more models to justify their fair value estimates to auditors. And while GPs have always endured challenging audit seasons, sources say the industry-wide transition to US Securities and Exchange Commission oversight last year has resulted in auditors taking a deeper look into firms’ fair value estimates.
“It isn’t helpful to us how much valuation work GPs are undergoing,” said a separate LP source. “They could figure out fair value using far more reasonable methodologies, which would let them deliver the reports on time.”
As a compromise, many GPs offer investors preliminary fair value estimates that have not yet been screened by auditors. But doing so can create a risk that the audited number ends up straying too far from the original estimate, which an LP’s own auditor may find curious, according to David Larsen, a managing director at valuation specialist Duff & Phelps, and who holds a seat on the International Private Equity and Venture Capital Valuation board.
“The auditor will say to the LP, well you closed your books with a fair value of 100, and the actual GP reported number is 50. And the LP says that is what the GP told me was the best information at that time. It puts them in an uncomfortable position,” said Larsen.
For more on how LPs are viewing this year’s audit season, and what they think of GPs’ time commitments to fair value estimates, see the September edition of PE Manager.