Best Practices for Managing Private Equity Portfolio Company Restatements

Private equity firms must carefully monitor portfolio company restatements to ensure appropriate awareness, provide subsequent updates to valuations and reporting, meet regulatory requirements, and keep on top of their investments’ progress. Chronograph’s portfolio monitoring technology — Chronograph for General Partners — uniquely helps private equity firms streamline their intake of portfolio company reporting, illuminate and contextualize restatements, and enable seamless updates to valuation and reporting workflows with full auditability.

How to Improve Private Equity Financial Restatement Workflows

While portfolio company updates and restatements are common, most private equity firms lack efficient infrastructure for identifying and responding to changes in portfolio company financial statements in their portfolio monitoring, valuation, and reporting efforts. Private equity analysts and associates might spend an entire workday chasing down updates for a portfolio company to respond to a limited partner information request or comparing previously reported data points.

With Chronograph’s next-generation portfolio monitoring solutions, private equity firms can create streamlined, institutionalized processes to identify restatements and ensure auditability of the restated metrics and their context.

Portfolio Company Restatements’ Impact on Private Equity Firms

When a private equity firm’s database or master Excel workbook contains outdated financial data or lacks context on restated metrics, historical reporting and valuations can become onerous to maintain and understand. Moreover, inadequate auditability of historical financials can create compliance risks with broader constituencies, including LPs, auditors, and regulators.

Preserving Institutional Knowledge

When private equity firms maintain accurate historical financials and associated context, they empower functions across the firm (and over time) to understand, align on, and collaborate from a single source of truth, yielding a more holistic understanding of portfolio companies’ financial and operational performance at any point of the investment lifecycle.

Sophisticated firms that take this approach are better equipped to support seamless internal transitions, assist portfolio companies with strategic decisions, ensure all stakeholders operate from the same contextual understanding, and ultimately reduce time wasted not driving value on deals.

Substantiating Valuation and Reporting Corrections to LPs

Material restatements to portfolio company operating expenses, revenue, and other P&L items have a cascading impact on profitability measures like EBITDA and other valuation drivers. Without a clear audit trail documenting the restated metrics and associated rationale, private equity firms could struggle to justify a significant valuation change to their investors in a transparent, compliant manner.

Monitoring the Value Creation Plan

Restatements can provide valuable insights into progress toward a value creation plan. Suppose a private equity firm aims to enhance a portfolio company’s profitability by boosting margins. Tracking unexpected changes in key margin drivers can give the investor a better understanding of the business. Investigating these changes can help the firm effectively monitor progress toward the value creation strategy and address any underlying financial or operational concerns.

How Chronograph’s Technology Streamlines Private Equity Restatement Workflows

Most typical private equity restatement workflows require significant manual data entry, lack auditability, and rely on decentralized collaboration. In a typical Excel-based process, a deal team associate may be forced to manually reconcile reporting periods, which is time consuming and error-prone.

When firms catch restatements, email is typically used for gathering contextual information, creating information silos and hampering the ability to document restated metrics in a manner that supports auditability. Template-based portfolio monitoring solutions pose similar frustrations, lacking a clean process for collecting trailing financials and an easy mechanism for identifying restatements.

Next-generation portfolio monitoring helps private equity firms establish intuitive, collaborative, and auditable processes to flag and manage portfolio restatements. Chronograph’s portfolio monitoring technology — Chronograph for General Partners — helps firms streamline their intake of portfolio company reporting, catch and contextualize restatements, and enable seamless updates to valuation and reporting workflows with full auditability.

Seamless Ingestion and Processing of Historical Financials

Chronograph’s flexible data model allows private equity firms to easily process trailing financials and flag restated metrics to both their internal stakeholders and the portfolio company. By bringing collaboration capabilities — including Data Flags as well as metric and workflow-level comments — directly into view for all relevant stakeholders, Chronograph supports a high degree of transparency and collaboration in ensuring appropriate dialogue and resolution of portfolio company restatements.

When metrics are flagged on Chronograph, private equity firms can employ various workflow functionalities to optimize restatement management. For example, they can alert portfolio companies when restatements are identified upon submission, requiring additional context and supporting documentation for approval.

Additionally, they can trigger internal workflows and approval layers, mandating internal team members to review restated submissions and provide sign-off before accepting a restated metric in the system. Alternatively, they can reject portfolio companies’ submissions entirely, requiring them to restart the submission process.

Qualitative Data Collection Helps Contextualize Restatements

The capability to collect qualitative data, such as comments or survey-like data requests, enables private equity firms to acquire the necessary context for their restatement workflows both internally and externally. Stakeholders can leave comments on metrics or initiate data requests to portfolio companies for additional context regarding a restatement.

For example, suppose a SaaS company’s ARR — a non-GAAP revenue metric and crucial valuation driver — dips significantly compared to a prior period’s reporting due to a restatement of a material contract. A private equity investor could use qualitative data collection tools to understand the underlying context behind the ARR adjustment.

Ultimately, Chronograph’s advanced functionalities allow private equity firms to better manage portfolio company restatements and drive trust in efficient technology-led collaboration across the firm.

Request a demo to see how Chronograph can help you efficiently monitor portfolio company restatements.

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