Financial statement audits and audit preparation for secondary market funds
Annual financial statement audits for secondaries funds involve complexity beyond typical private fund audits due to the portfolio-of-funds structure. Auditors must evaluate valuations across potentially hundreds of underlying positions, assess purchase price allocation methodologies, and verify cash flows from numerous fund interests. Preparing effectively for audits reduces disruption and supports timely completion.
Most institutional secondaries funds require annual audited financial statements. The audit scope typically encompasses:
Partnership agreements typically require audited financials within 90 to 120 days after year-end, though the complexity of secondaries audits sometimes challenges this timeline.
Fair value measurement represents the most substantive audit area for secondaries funds. Auditors apply procedures including:
Understanding the valuation methodology used for underlying fund positions, typically based on NAVs reported by underlying GPs adjusted for any subsequent events or information.
Testing the accuracy of underlying NAV data by confirming values directly with underlying fund administrators or GPs, or by obtaining audited financial statements for underlying funds.
Evaluating any adjustments made to reported NAVs based on subsequent information, market conditions, or fund-specific considerations.
Assessing the treatment of purchase discounts or premiums, including whether amortization or other accounting treatment is appropriate and consistently applied.
For larger positions or where underlying fund audits are not yet complete, auditors may perform additional procedures including analytical review of underlying portfolio companies or independent valuation testing.
Secondaries fund audits often face timing constraints because the fund's valuation depends on underlying fund data. Many underlying funds complete their own audits on similar timelines, creating a sequencing challenge where secondaries fund auditors need information that may not yet be finalized.
Common approaches to managing this timing include:
Using estimated or preliminary NAVs for underlying positions, with subsequent procedures to confirm final values when available.
Phasing audit work to complete testing of other areas while awaiting underlying fund information.
Coordinating with underlying fund auditors or administrators to obtain information as early as possible.
In some cases, delaying secondaries fund audit completion until sufficient underlying fund data is available, which may require LP communication about timeline expectations.
Auditors examine how acquisition transactions are recorded, including:
Verification that purchase prices are accurately recorded and supported by transaction documentation.
Assessment of purchase price allocation methodologies when portfolios of positions are acquired for a single price.
Review of any fair value adjustments made at acquisition, including the basis for any day-one gains or losses recognized.
Testing that acquired positions are properly categorized and disclosed in the schedule of investments.
Given the volume of cash movements in secondaries funds, auditors verify:
Capital calls issued to LPs and the corresponding capital inflows.
Capital calls received from underlying funds and payments made.
Distributions received from underlying funds and the allocation to the secondaries fund.
Distributions made to LPs including proper waterfall application.
Reconciliation of bank statements to recorded cash activity.
GP-led continuation vehicles and other transactions involving affiliated parties receive particular audit attention. Auditors assess:
Whether transactions with related parties are identified and disclosed appropriately.
The process for evaluating and approving transactions where potential conflicts exist.
Compliance with partnership agreement provisions regarding conflict situations.
Appropriateness of valuations for related party transactions.
Preparing effectively for audits supports efficiency and timely completion:
When selecting auditors, secondaries funds should evaluate: