Audit ready: A first-time guide for private equity fund managers — SBIC vs. regular structures

In private equity, audit readiness is often framed around portfolio companies and their ability to deliver timely, accurate financials. But what happens when the lens shifts to the fund itself?

Fund-level audits, particularly for Small Business Investment Companies (SBICs), introduce a distinct set of challenges and compliance requirements that deserve equal attention. While delays at the portfolio level can erode investor trust and complicate reporting cycles, inefficiencies at the fund level may disrupt capital calls, delay distributions, and invite regulatory scrutiny.

Fund managers must understand the distinct audit rules tied to fund classification. For funds operating under the SBIC program, the stakes are even higher as noncompliance can jeopardize access to Small Business Administration (SBA) leverage and hinder future fundraising efforts.

This guide explores the nuances of fund-level audit preparedness, outlines key differences between SBIC and non-SBIC audits, and offers practical strategies for managing both effectively.

Common Pitfalls in Fund-Level Audit Preparation

Based on our experience with portfolio company audits, many of the same challenges show up at the fund level, often with added complexity, regulatory pressure, and tighter timelines. Below are several frequent issues that can be avoided with thoughtful planning and the right resources:

• Insufficient documentation for valuation adjustments and portfolio company financials, which can slow down the audit process and raise red flags.
• Uncertainty around SBA-specific reporting requirements, especially for funds operating under the SBIC program, where compliance expectations are more rigid.
• Misalignment between fund accounting and compliance teams, particularly when managing both GAAP and SBA standards. This disconnect can lead to inconsistent reporting, missed deadlines, and audit delays.
• Limited internal experience with SBA Form 468, including its structure, submission timeline, audit implications, and how it differs from standard fund reporting.

6 Audit Preparedness Steps for SBIC and Non-SBIC Funds

Fund-level audits require a clear understanding of how accounting standards differ across fund types. These six steps can help improve your audit preparation and reduce compliance risk:

1. Understand How Unrealized Gains and Losses Are Treated

• Non-SBIC Funds (U.S. GAAP): Changes in unrealized gains/losses are recognized as part of net income or loss on the statement of operations.
• SBIC Funds: Unrealized appreciation or depreciation is recorded directly to equity, not through the statement of operations. This shields net income from fair value fluctuations, aligning with the SBA’s conservative approach.

2. Apply the Correct Valuation Methodology

• Non-SBIC Funds (U.S. GAAP): Investments are marked to fair value at each valuation date (typically year-end).
• SBIC Funds: Valuation follows SBA guidelines:
  
  • Cost is presumed fair value unless justified otherwise.
  • Unrealized appreciation is limited to investments with sustained economic justification for an increase in value.
  • Unrealized depreciation is recorded when portfolio companies show sustained poor performance.
  • Permanent declines trigger write-offs as realized losses.

3. Prepare Investment Detail with Fair Value Adjustments

Be ready to provide a breakdown of all investments, including any adjustments made to fair value and the rationale behind them.

4. Gather Portfolio Company Financial Statements

Auditors will require financials from underlying portfolio companies to validate fund-level reporting.

5. Document Valuation Models and Justifications

Maintain clear documentation of valuation methodologies and support for any changes in investment value.

6. Track and Meet Reporting Deadlines

• SBIC Funds: Must file SBA Form 468 within three months of fiscal year-end (e.g., March 31 for a December 31 year-end).
• Non-SBIC Funds: Follow deadlines outlined in partnership agreements, typically 90–120 days post year-end.

We Can Help

At Elliott Davis, we specialize in guiding private equity firms through both portfolio and fund-level audits. Whether you're working through GAAP, SBA standards, or both, our team offers tailored support to streamline your audit process and build investor confidence.

Reach out today to learn how we can help make your next audit cycle smoother.

Looking for guidance on portfolio company audit readiness? Check out our related article.