Multiplying Private Equity Value through Internal Controls

Private equity firms must always be on the up-and-up when it comes to boosting value for their portfolio companies. While we’re all familiar with the tried-and-trued strategies of financial engineering, identifying cost-cutting strategies and aiding in market expansion, many private equity leaders tend to forget about strengthening their governance and adding internal controls. Internal controls is a term often thrown around with little understanding of its significant impact on both safeguarding and generating value. But have no fear, we’ll break it down for you in this article:

Protecting Value

Internal controls are best known as processes, procedures, and preventative measures to protect assets and ensure accurate financial reporting. This puts controls in place that cover all your bases: prevention, deterrent, detection and correction.

Believe it or not, a strong internal controls environment does more than that. It also mitigates risks related to operations, capital management and other unfavorable events that affect the investment returns you’ve worked so hard to achieve. Risks like legal penalties and regulatory fines can be prevented with internal controls best practices that help you adhere to relevant laws, regulations and industry standards.

Trickle-Down Advantages

Why is this so important for private equity firm’s portfolio companies? This is what we like to call the “trickle-down effect.” Internal controls in a portfolio business has advantages beyond protecting assets and fraud prevention. It enhances decision-making and increases investor confidence. Here’s how:

Effective controls around financial reporting and data provide a solid foundation for decision-making. This is because it gives you one of the closest things to peace of mind in ensuring the accuracy and completeness of financial and operational data. With this information on hand, there’s nothing stopping private equity firms from making informed action plans on other value-added strategies.

Last point we’ll make about this (and we have plenty; we are internal controls enthusiasts!): effective risk management and a strong tone at the top bolsters the confidence of your potential and existing investors and stakeholders. Seeing that a company has robust internal controls makes investors feel more secure about the integrity of your operations and your commitment to compliance and risk management.

Generating Value

So you’ve protected your data and financial reporting – great! What about driving new, additional value? You can use internal controls to also help streamline procedures through standardization, which reduces redundancies, increases consistency and makes operations more effective. Using the insight gained from an internal controls review, private equity leaders can allocate resources more effectively by identifying what you can stop investing in and what might need a little more TLC.

In Conclusion

Internal controls enhance value for private equity firms because it safeguards assets, mitigates risk, enhances decision-making and boosts investor confidence. And why wouldn’t you want to drive greater value creation and operational efficiency? When you’re ready to take the plunge into exploring internal controls and governance in your portfolio companies, reach out to our internal audit pros.

About our Authors

Jesse Laseman, CIA, CFE, is an internal audit consultant on the governance, risk and compliance team. His expertise includes operational audits, data analysis and interpretation, and the development/implementation of internal control recommendations.

John Iwanski is a principal of transaction advisory services with over 25 years of experience in auditing, consulting, advisory and executive positions specializing in transaction advisory services. As a senior leader, he has demonstrated an ability to work cohesively as a resource to clients across multiple geographies, driving strategic business growth.