Financial Audits for Secondaries Funds: Valuation Testing, Multi-Fund Confirmations, and Basis Verification

Secondaries fund audits focus on LP interest valuation testing given reliance on underlying fund NAV reports, purchase accounting review ensuring proper basis allocation at acquisition, confirmation procedures obtaining information from numerous underlying funds, and performance calculation testing verifying IRR accuracy from acquisition dates through exits. Auditors must understand secondaries economics, valuation approaches for LP interests, and complexities of multi-fund portfolio coordination.

LP Interest Valuation Testing

LP interest valuations typically equal proportionate shares of underlying fund NAV adjusted for any discounts or premiums justified by market conditions, liquidity considerations, or portfolio-specific factors. Auditors test valuations by obtaining underlying fund financial statements and NAV reports, reviewing underlying fund auditor reports when available, assessing discount or premium rationale and support, evaluating comparability to market transaction multiples, and testing mathematical accuracy of calculations. Material premium or discount changes versus acquisition pricing require explanation supported by underlying fund performance changes, market condition shifts, or liquidity event proximity.

Purchase Accounting Review

Acquisition accounting requires auditor review of purchase price allocations to underlying portfolio companies. Auditors examine purchase agreements and closing statements, review basis allocation methodologies and support, test Section 743(b) adjustment calculations when applicable, and verify ongoing basis tracking and amortization. Proper purchase accounting ensures financial statements accurately reflect acquisition costs and subsequent performance.

Multi-Fund Confirmation Procedures

Auditors obtain confirmations from underlying fund administrators verifying LP interest ownership, capital account balances, unfunded commitment amounts, and recent capital calls and distributions. Confirmations provide independent verification beyond fund records preventing reliance solely on internal tracking. The CFO coordinates confirmation distribution across potentially dozens of underlying funds tracking responses and resolving any discrepancies identified.

Key Takeaways

• Valuation relies on underlying fund NAV: LP interest values typically reflect proportionate NAV shares requiring auditor review of underlying fund financial statements and audits.
• Purchase accounting requires allocation review: Auditors test basis allocation to underlying companies and ongoing tracking ensuring proper accounting for acquisitions.
• Multi-fund confirmations provide independent verification: Obtaining confirmations from numerous underlying fund administrators verifies ownership and capital accounts beyond internal records.
• Coordination complexity exceeds single-fund audits: Managing audit procedures across multiple underlying funds with different administrators and timing creates operational intensity requiring systematic processes.