Key Portfolio Accounting Challenges for Private Equity Managers
Private equity (PE) in India has been on a steady rise over the past two decades. From early growth capital in family-owned businesses to large buyouts in sectors like infrastructure, fintech, and healthcare, PE has become a central player in India’s investment landscape. But with this opportunity comes a complex operational reality: managing portfolio accounting.
For private equity managers, the challenges are not only about finding the right deal or driving portfolio growth. A major hurdle often lies in something that seems less glamorous but is absolutely critical—accounting and financial management across portfolio companies.
This blog takes a closer look at the key portfolio accounting challenges faced by private equity managers, especially in the Indian context, and why solving them is crucial for long-term success.
1. The Complexity of Diverse Portfolios
Most PE managers in India do not restrict themselves to a single sector. One fund may simultaneously hold stakes in a logistics company, a consumer-tech startup, a renewable energy player, and a healthcare chain. Each of these businesses has its own accounting practices, reporting standards, and compliance burdens.
- Varied accounting frameworks: Some portfolio companies may follow Indian Accounting Standards (Ind-AS), while others—especially those with international investors—might adopt IFRS or US GAAP. Consolidating numbers across these frameworks can feel like comparing apples to mangoes.
- Different maturity levels: Startups often lack robust finance teams and rely on basic bookkeeping. Mature companies, on the other hand, may have sophisticated ERP systems. PE managers must deal with both extremes at once.
The result is a complex mosaic where comparing performance across the portfolio is far from straightforward.
2. Data Quality and Timeliness
For a PE manager, delayed or inaccurate data is like flying an aircraft blindfolded. Yet this is a recurring problem:
- Delayed monthly closes: Smaller portfolio firms often take weeks—or even months—to finalize their books. By the time reports are consolidated at the fund level, the numbers may already be outdated.
- Manual processes: Many Indian SMEs and startups still rely on spreadsheets or outdated software. This increases the risk of human error and makes it harder to integrate data.
- Inconsistent reporting: Some companies might provide detailed segmental revenues and margins, while others only share topline figures.
The lack of standardized, timely reporting can cause serious delays in fund reporting to limited partners (LPs) and regulators.
3. Valuation Challenges
Valuing portfolio companies is one of the toughest aspects of private equity accounting. This becomes even more difficult in India due to the diversity of sectors and the lack of consistent benchmarks.
- Illiquid investments: Unlike public equities, most PE stakes are not traded in liquid markets. Valuation often depends on discounted cash flows, comparable multiples, or the last funding round. Each method comes with its own assumptions and limitations.
- Regulatory scrutiny: SEBI requires Alternative Investment Funds (AIFs) to disclose fair value of investments periodically. LPs also demand transparency. Any mismatch between reported valuation and actual exit value can hurt credibility.
- Volatility in certain sectors: Technology and fintech firms can see valuations swing wildly between funding rounds. PE managers need to carefully balance optimism with realism.
Getting valuations wrong not only risks investor trust but can also trigger tax and compliance complications.
4. Consolidation Across Geographies
Many Indian PE funds invest in companies with cross-border operations. A consumer brand may have subsidiaries in Singapore, a tech startup may bill clients in the US, and a logistics firm may have a Dubai branch.
- Currency translation issues: Fluctuations in INR against USD, EUR, or AED can materially affect consolidated financials.
- Different tax regimes: Transfer pricing, withholding taxes, and local GAAP differences add layers of complexity.
- Global reporting obligations: International investors often demand reports aligned to global standards, not just Indian regulations.
This creates a juggling act for accounting teams, where every consolidation round can feel like reinventing the wheel.
5. Regulatory Compliance Maze
India’s regulatory environment is evolving rapidly. While this is good for transparency, it also increases the compliance burden.
- SEBI AIF regulations: Funds must disclose investment valuations, fees, and expenses regularly.
- RBI guidelines: For funds investing in or receiving capital from offshore investors, RBI’s foreign exchange management rules apply.
- Tax complexity: GST, TDS, MAT, and capital gains taxation—all must be carefully managed. Even a small misstep can lead to penalties or litigation.
- Industry-specific compliance: For example, healthcare portfolio companies must adhere to clinical regulations, while fintech startups face RBI and data privacy rules.
PE managers must ensure that each portfolio company not only complies individually but also contributes accurate data for consolidated fund-level reporting.
6. Exit Readiness and IPO Preparation
An exit—whether through IPO, secondary sale, or strategic acquisition—is the ultimate goal for a private equity investor. But exit readiness often exposes hidden cracks in accounting.
- Due diligence hurdles: Acquirers or public markets demand clean books, audited financials, and clarity on contingent liabilities. Any weakness here can delay or reduce exit valuations.
- Restatements: Sometimes portfolio companies must restate financials to meet IPO disclosure norms, which can be both costly and embarrassing.
- Internal controls: Weak internal control frameworks can scare off potential buyers or investors.
A PE manager must therefore push portfolio companies to “behave like a listed company” long before an actual listing.
7. Technology Integration Gaps
While India has a thriving IT services industry, ironically, many portfolio companies—and even some funds—lag in adopting modern financial technologies.
- ERP implementation challenges: Rolling out ERP across different portfolio firms is easier said than done. It requires capital, training, and process redesign.
- Lack of integration: Even when ERPs are deployed, different companies may use different platforms (SAP, Oracle, Zoho, Tally), making consolidation harder.
- Cybersecurity concerns: With sensitive investor and financial data being shared, robust data protection is a must. Any breach can damage trust.
Without smart tech adoption, portfolio accounting remains a manual, error-prone process.
8. Performance Measurement Beyond Financials
Private equity managers are increasingly judged not only on financial returns but also on ESG (Environmental, Social, and Governance) metrics.
- ESG data collection: Measuring carbon footprint, employee diversity, or board independence is not straightforward.
- Standardization issues: Global investors may expect adherence to frameworks like GRI or SASB, but many Indian firms lack such systems.
- Balancing priorities: A company might show strong EBITDA growth but weak compliance with sustainability goals. Reconciling the two in reporting is tricky.
As LPs become more socially conscious, ignoring ESG reporting can become a deal-breaker.
9. Human Capital Constraints
Finally, the human side of accounting cannot be ignored.
- Shortage of skilled professionals: Experienced finance professionals who understand both PE requirements and local compliance are in high demand. Smaller portfolio firms often struggle to attract and retain them.
- Dependence on external auditors: While auditors provide oversight, excessive reliance can delay processes and reduce internal accountability.
- Cultural differences: PE managers often push for stricter reporting discipline, but founders of family-owned or startup businesses may see it as unnecessary bureaucracy. This creates friction.
Balancing these human factors with technical accuracy is an art in itself.
10. The Way Forward
The challenges are real, but not insurmountable. Indian private equity managers can take several steps to strengthen portfolio accounting:
- Standardization: Establish common reporting templates across portfolio companies.
- Capacity building: Invest in training finance teams within portfolio firms.
- Technology adoption: Encourage adoption of cloud-based accounting and consolidation tools.
- Third-party support: Engage specialized fund administrators or accounting firms where needed.
- Forward planning: Prepare companies for exit readiness early, instead of scrambling at the last moment.
In the long run, stronger accounting practices not only reduce compliance risks but also enhance portfolio performance, improve LP trust, and boost exit valuations.
Conclusion
Private equity in India is at an exciting crossroads. Deal sizes are increasing, global LP interest is strong, and Indian entrepreneurs are eager for growth capital. Yet behind every successful exit lies months and years of painstaking accounting work.
For PE managers, the accounting challenges—diverse portfolios, delayed reporting, valuation complexities, cross-border consolidation, regulatory burdens, exit readiness, and ESG demands—are not side issues. They are central to fund success.
Getting portfolio accounting right is not just about ticking compliance boxes. It is about building trust—with investors, with regulators, and with portfolio companies themselves. In India’s fast-evolving PE ecosystem, those who can master this art will be the ones who stand out.