Related Party Transactions in PE Portfolio Companies: Getting the Disclosures Right
Management fees, shareholder loans and shared directors all create related party transactions. Why they cause late audit adjustments and how to stay ahead.
Private equity ownership creates related party relationships almost by default. Monitoring fees paid to the sponsor, loan notes held by the fund, directors sitting on several portfolio boards and management rollover equity all fall within the definition.
Related party disclosures are a frequent source of late audit adjustments, not because the amounts are large but because nobody kept a complete list.
Build and maintain a register
Start with a register of related parties: the fund and its general partner, other portfolio companies under common control, directors and their close family, and key management personnel. Update it whenever a director joins or leaves another board.
Ask each director to confirm their interests annually in writing. That confirmation is useful audit evidence in its own right.
Capture transactions as they happen
Flag related party suppliers and customers in the accounting system so transactions can be reported at any time. Typical items include monitoring and arrangement fees, interest accruing on shareholder loan notes, recharged costs and trading with sister companies.
Interest on loan notes is often rolled up rather than paid, which makes it easy to overlook in the disclosures even though the balances can be significant.
Watch the arm's length question
Disclosures should not imply transactions were on normal commercial terms unless that can be supported. Intra-group pricing between portfolio companies deserves particular care, as it may also raise tax questions.
Board approval and minutes
Material related party arrangements should be approved by the board with conflicted directors noted. Clear minutes help both the auditor and any future buyer understand the history.
Make it a year end routine
Reconcile the register to the ledger before the audit begins and share it with the auditor early. Finding a missing related party in October is far easier than finding it the week the accounts are due to be signed.