Audit and Assurance for Infrastructure Funds

Audit requirements for infrastructure funds extend across multiple levels—fund financial statements, management company financials, and often portfolio asset audits required by project finance lenders. The structural complexity typical of infrastructure investments, combined with long fund lives and valuation challenges for long-duration assets, creates audit considerations that differ from shorter-duration strategies. Coordinating these audit workstreams while managing costs and meeting various stakeholder timelines requires careful planning.

Fund Financial Statement Audits

Annual audited financial statements are standard for infrastructure funds and typically required by fund governing documents. The audit provides independent verification of fund financial position, investment valuations, and compliance with accounting standards.

Key audit areas for infrastructure funds include:

• Investment Valuation: Infrastructure assets are typically valued using discounted cash flow methodologies applied to contracted or projected revenues over extended periods. Auditors scrutinize valuation inputs including discount rates, revenue assumptions, terminal values, and the appropriateness of models for specific asset types.
• Complex Structures: Infrastructure investments often involve multiple entities—holding companies, operating subsidiaries, and co-investment vehicles. Auditors must understand consolidation decisions, related party transactions, and intercompany arrangements.
• Revenue Recognition: For funds that consolidate operating assets, revenue recognition policies for contracted arrangements like power purchase agreements or concession agreements require audit attention.
• Debt and Financial Instruments: Asset-level project finance, fund-level subscription facilities, and currency or interest rate hedges all require proper accounting treatment and disclosure.
• Partnership Allocations: Audit procedures verify that income, expenses, and capital are allocated among partners according to partnership agreement provisions, including carried interest calculations.

Selecting Fund Auditors

Auditor selection should consider experience with infrastructure funds specifically, not just private equity or alternative investments generally. Infrastructure-specific considerations include:

• Experience with valuation of long-duration infrastructure assets across relevant sectors
• Understanding of project finance structures and asset-level debt accounting
• Capacity to handle complex multi-entity structures across jurisdictions
• Resources for coordinating with asset-level auditors when required
• Firm stability over extended fund lives

The long fund life characteristic of infrastructure makes auditor selection consequential. Changing auditors mid-fund-life creates transition costs and risks, so initial selection should consider the relationship extending 15-25 years.

Asset-Level Audit Requirements

Project finance lenders commonly require audited financial statements for asset-level entities. These audits serve lender covenant monitoring and provide independent verification of operating results that determine debt service capacity.

Asset-level audits typically cover:

• Operating company revenue and expenses
• Compliance with debt covenant requirements
• Capital expenditure and maintenance reserve accounts
• Related party transactions with fund or manager entities

Coordinating fund-level and asset-level audits presents practical challenges. Different fiscal year-ends, varied auditor appointments, and timing dependencies between audit levels require advance planning. Many fund managers standardize asset-level auditors where possible to simplify coordination.

Valuation Audit Procedures

Given the significance of valuations for infrastructure funds, audit procedures in this area deserve particular attention. Auditors typically:

• Evaluate the appropriateness of valuation methodologies for specific asset types
• Test key inputs including discount rates, growth assumptions, and terminal values
• Assess reasonableness of long-term projections underlying DCF models
• Review third-party valuation reports when obtained
• Consider comparable transaction data where available
• Evaluate the impact of regulatory changes on asset values

Infrastructure valuations involve substantial judgment given the long time horizons and sensitivity to discount rate assumptions. Maintaining documentation of valuation decisions and supporting analysis throughout the year facilitates the audit process.

Timing and Coordination

Infrastructure fund audits often face timing challenges given dependencies on portfolio asset information. Asset-level financial data, operating metrics, and subsidiary audits may need to be completed before fund-level audit can conclude.

Planning considerations include:

• Setting fund fiscal year-end to allow time for asset-level data collection
• Coordinating asset-level audit timing with fund audit requirements
• Establishing data collection processes with portfolio asset finance teams
• Planning valuation processes to complete before audit fieldwork
• Communicating timeline expectations with fund administrator and auditor

Many institutional LPs have specific timing requirements for receiving audited financials, which may need to be balanced against the complexity of infrastructure fund audits.

Management Company Audits

Management company financial statements may also require audit, depending on regulatory requirements, fund document provisions, or LP requests. Management company audits cover fee revenue, operating expenses, and carried interest where applicable. Ensuring proper expense allocation between management company and funds receives audit attention.

Internal Controls and SOC Reports

Institutional investors increasingly request SOC 1 reports from fund administrators and other service providers, providing assurance over controls relevant to financial reporting. Infrastructure fund managers should understand what SOC reports are available from their service providers and how these reports address infrastructure-specific processes.

For larger infrastructure managers, implementing internal controls over financial reporting and potentially obtaining SOC reports on manager operations may be expected by institutional LPs.

Questions to Address with Auditors

• What experience does the firm have specifically with infrastructure fund audits?
• How will valuation audit procedures address long-duration DCF models for infrastructure assets?
• What approach will be taken to coordinate fund-level and asset-level audit requirements?
• How will multi-jurisdictional structures and foreign asset audits be handled?
• What is the expected audit timeline, and how does it accommodate asset-level information dependencies?
• How are audit fees structured over the extended fund life?

Audit requirements for infrastructure funds reflect the structural complexity and long-duration nature of the asset class. Establishing appropriate auditor relationships and coordination processes from fund formation supports efficient annual audit cycles throughout the extended fund lifecycle.