Accelerating management insights into portfolio companies’ finance operations

By Kevin Krumm and Jason Menghi, Audit & Assurance partners,, Deloitte & Touche LLP

Talking points

• The quality of a portfolio company’s finance and accounting operations are typically important to its value and investment returns.
• Yet private equity firms often have limited visibility into the operational details of a portfolio company during the M&A transaction.
• New diagnostics can accelerate the process of understanding a portfolio company’s finance and accounting operations—enhancing efficiency and compliance. 

If  you ask the CFO of a private equity firm about the firm’s top priorities, you’ll almost certainly hear about meeting investor expectations for higher returns by improving the value of each portfolio company. It’s generally what PE companies were born to do. 

One thing standing in the way is the unknown—as in not having detailed knowledge of a portco’s accounting processes, personnel, and internal controls. During the acquisition phase, private equity firms may only get a birds-eye view of these operations. It’s not until they deep-dive into operational nuts and bolts after the acquisition closes that unexpected issues can declare themselves—things like costly internal finance and accounting operations, non-timely audit and internal management reports, expensive debt extensions or waivers, internal control material weaknesses, and even shadow finance organizations. 

Accelerating portfolio company diagnostics

Getting up to speed on operational details is often the first step in streamlining finance and accounting processes, turning problems around, and increasing value to investors. Gathering this information, however, is easier said than done—especially in the early days post-deal   when it’s most needed.

So how can private equity firms gather this information in a timely manner? Deloitte recently launched a suite of rapid diagnostics that simplify and accelerate the process by providing an analysis and diagnostic methodology for gathering critical finance information. 

Portfolio Company Diagnostic Suite: a systematic approach to visibility

The Portfolio Company Diagnostic Suite can enhance portco finance and accounting visibility and transparency. The suite consists of a series of diagnostics that inform in order to gauge data reliability and provide operational insights, benchmarking, and comparability. Each diagnostic revolves around a stakeholder interview process that Deloitte professionals conduct with portfolio company team members. 

The process results in a deliverable with actionable recommendations. Ultimately, the diagnostics inform portfolio companies whether the people with the appropriate skillset, processes, and mechanisms are in place to get required financial information to those who need it in a timely and cost-effective manner. 

The suite includes:

• Rapid Finance Diagnostic
• Governance, Risk, & Controls Diagnostic
• ESG Diagnostic  

Here’s a breakdown of these diagnostics and how they can add transparency to portfolio companies.

Rapid Finance Diagnostic: This diagnostic provides a systematic approach for evaluating the finance organization, with a focus on audit and reporting readiness. Stakeholder interviews take place across accounting and finance over a four-week timeframe to gain insight into the structure of the organization along with its processes and technology. The diagnostic provides insights to private equity firms allowing them to understand the state of the newly acquired portco’s internal reporting and positioning for a Big Four audit—with an eye toward identifying risks that could interfere with compliance.   The process also works to drive operational efficiencies across finance and accounting, often resulting in reduced costs across the organization. 

Governance, Risk, & Controls (GRC) Diagnostic: The GRC Diagnostic uses   surveys to evaluate governance processes and internal controls. It works to identify internal controls issues and outlines possible improvements to reduce the cost of compliance, potentially avoid misstatements, and help to prevent fraud. 

Environmental, Social, & Governance (ESG) Diagnostic: This diagnostic involves a brief survey process to evaluate the potential applicability of environmental, social, and governance regulations and the maturity of the portco from an ESG perspective. The process focuses specifically on environmental data gathering and reporting. Additional portco-specific workshops and readiness diagnostics are available based on initial findings and needs.

Results

Used together or separately, these diagnostics may provide insights that can deliver timely, accurate, and reliable financial information that portfolio companies and private equity firms need to make informed, strategic decisions. They can gauge the quality of a portco’s financial reporting, identify potential external audit issues and fraud risks, and outline steps to remediate risks and process gaps that could significantly impact financial results. Equally important, the diagnostics may support increased   finance and accounting efficiency and lower costs. 

What role can Deloitte play?

Reach out to learn more about our Portfolio Company Finance Diagnostics Suite and the value it can bring to your existing portfolio companies or next acquisition.

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