What Should a Family Office Examine in a Private Equity Firm's Portfolio Company Reports?

Use portfolio company reports to see whether the private equity firm is improving the businesses it bought and whether the original investment case still holds. Read each report against prior results, the operating plan, and debt the company must service. A headline return or summary slide will not explain what changed inside the business.

Compare Results With the Operating Plan

Review revenue, margins, operating earnings, cash flow, working capital, and capital spending. Ask for a period-to-period bridge that explains the movements. Separate results from acquisitions, asset sales, accounting changes, or cost adjustments. If EBITDA is reported, review its calculation and identify recurring adjustments. EBITDA can inform a sale valuation, but it does not show all cash needs or payments due to lenders.

Compare actual results with the entry case and the company budget for that period. When a target is missed, ask what caused the gap, who is responsible for the response, and how progress will be measured. Request supporting operating data when the explanation depends on customer retention, pricing, production, or integration. For a focused review of the underlying statements, see how to check portfolio company financial statements.

Examine Debt and Cash Capacity

Review debt balances, interest expense, maturities, covenant headroom, and cash available for operations. In a buyout, the portfolio company may carry borrowing used to finance its purchase and make the payments. This can increase equity returns when the business performs, while leaving less room for missed targets or operating setbacks.

Ask whether the report shows all material borrowing and contingent obligations. Compare near-term cash needs with collections, supplier payments, payroll, capital spending, and required debt service. If the company needs sponsor support, new financing, or a sale of assets, ask whether the source is committed and what happens if it does not arrive. Review the assumptions behind any plan to refinance or reduce debt. For a fund-level view of borrowing, see how to evaluate a fund's use of borrowing.

Challenge Valuation and Exit Assumptions

Ask how the reported value was calculated and what changed since the prior report. Review the operating metric, valuation multiple, market evidence, and debt balance used in the calculation. Keep realized cash proceeds separate from estimates. A rising reported value may depend on earnings growth, debt reduction, or a higher exit multiple. Ask which of those drivers has occurred and which remains a forecast.

Examine the expected path to liquidity and the conditions it depends on. If a sale is the plan, ask what operating milestones remain and whether the proposed timing assumes a specific type of buyer or market condition. Private equity holdings may be difficult to sell on an investor's preferred schedule, so portfolio reports should make delays and alternatives clear.

Track Unresolved Actions

Maintain a record of material risks, promised corrective steps, responsible people, and due dates. At the next reporting period, compare the evidence with what the sponsor said would happen. Escalate recurring missed commitments, unexplained changes in reporting, or a plan that depends on financing without a clear source. Ask the investment team to flag what could cause a permanent loss and what evidence would change its view.

Questions for the sponsor include:

• "Which operating targets have missed plan, and what records explain the gap?"
• "How much cash is available after operating needs and debt service?"
• "What adjustments are included in reported EBITDA?"
• "Which assumptions support the reported company value?"
• "What milestones remain before the expected exit, and who is responsible for each?"

Bring material changes to the family office's investment committee and record the evidence reviewed. See investment committees and advisory boards for related governance practices.

Checklist

• Compare company results with prior periods and the entry plan.
• Reconcile major operating changes to supporting records.
• Review debt, maturities, cash needs, and covenant headroom.
• Separate realized proceeds from estimated valuation.
• Track corrective actions and responsible people; note due dates separately.
• Escalate missed milestones and unsupported funding assumptions.

Read next: How should a family office evaluate a fund's use of borrowing?

The principal concern when investing in private equity is the lack of liquidity.

Sources: Family Office Club investor due diligence framework, How to Start a Family Office, The Single Family Office. Informational only, not financial, legal or tax advice.