What it is
Audited financial statements for a private fund are the fund's formal financial reports, such as a statement of assets and liabilities, a statement of operations, and accompanying notes. An independent auditor reviews them and issues an opinion on whether they are presented fairly under an accounting framework, commonly U.S. GAAP.
An audit is different from a compilation or a review. An audit involves more testing and verification by the auditor. It is not a guarantee that a fund is sound, that the manager is skilled, or that an investment will do well.
Private funds are generally offered under exemptions from registration, such as SEC Rule 506(b) or Rule 506(c). Rule 506(b) does not permit general solicitation. Rule 506(c) permits general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Whether a fund provides audited statements, and to whom, is usually described in its own offering documents.
How it’s traditionally been approached
Traditionally, people doing due diligence on a private fund have asked whether the fund is audited every year, by which firm, and whether the auditor's opinion was clean or contained qualifications. They have also asked how soon after year-end the reports are delivered.
Readers often look at the notes to the financial statements, which may explain how holdings are valued, what related-party arrangements exist, and what fees and expenses the fund bears. Valuation of hard-to-price assets is a common area of attention.
Some investors also consider the auditor's independence and experience with similar funds, and compare the audited reports with other documents the manager provides. Many also ask their own licensed accountants or attorneys to review the materials. Tax reporting, such as Schedule K-1, is a separate matter, and tax treatment depends on individual circumstances.
How the right fund manager may help
The right fund due diligence professional or fund manager may help you understand what you are looking at. A conversation is generally a chance to walk through a sample set of statements, learn the vocabulary, and see how the audit fits with the rest of a fund's documents. It is education, not a recommendation.
Helpful questions may include: Is the fund audited annually, and by whom? When are statements delivered? Has the auditor ever issued a qualified opinion? How are illiquid assets valued, and who is involved in that process? Which fees and expenses appear in the statements?
You might also ask how the manager handles questions after you read the reports, and what other documents, such as the private placement memorandum and subscription agreement, should be read alongside them. Your own licensed investment, legal and tax advisers should review anything you are considering.
The bigger picture
Reviewing financial documents can feel heavy, especially when a decision involves your savings or your family's future. It is normal to feel uncertain about unfamiliar terms. Taking time, asking plain questions, and having a trusted adviser nearby may support greater peace of mind.
Money decisions are connected to sleep, stress and relationships. Giving yourself room to step back, and not feeling rushed, is part of looking after the whole person. If stress around finances is affecting your wellbeing, Providers.plus may help you find supportive professionals.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- An audit is not a guarantee of safety, quality or results. Past performance does not guarantee future results.
- The Hastings Fund is an independent educational directory. It is not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank any investment. Nothing here is an offer to sell or a solicitation of an offer to buy any security.
- Consult your own licensed investment, legal and tax advisers. Tax treatment, including any K-1 reporting or QSBS (Section 1202) questions, depends on individual circumstances.
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Create an investor account →Frequently asked questions
What are audited financial statements for a private fund?
Audited financial statements for a private fund are the fund's annual financial reports that an independent accounting firm has examined and given an opinion on. They usually include statements of assets, operations and cash flows, plus notes. An audit does not guarantee a fund's quality or future results.
Are all private funds required to have audited financial statements?
No, requirements vary depending on the fund's structure, its adviser and its governing documents. Some funds provide audits annually, while others may not. The fund's own offering documents describe what it provides, and your licensed legal adviser can explain how rules apply.
Why do people ask for audited financials during due diligence?
Audited financials give an independent party's view on whether a fund's reports are fairly presented. They are one input among many and are usually read with other documents. They do not replace advice from your own licensed professionals.
What is a qualified audit opinion?
A qualified opinion means the auditor found a limitation or departure from accounting standards in some area, while otherwise finding the statements fairly presented. Readers who see one often ask the manager and their own accountant for an explanation. A clean opinion is not a guarantee of future outcomes either.
Do I need to be an accredited investor to see a private fund's audited statements?
Access is generally governed by the fund's offering documents and the exemption it relies on. Many private funds are offered to accredited investors under SEC Rule 501(a), which includes categories such as certain income or net worth thresholds, holders of Series 7, 65 or 82 licenses, and certain entities. Under Rule 506(c), all purchasers must be accredited and the issuer must take reasonable steps to verify.
Do audited financial statements show a private fund's risk?
They can show some information, such as holdings, valuation methods, and fees, but they do not capture every risk. Private fund investments are speculative and illiquid and can lose all of their value. Ask a licensed adviser to help you consider the full picture.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.