How Investment Companies Can Strengthen Controls Across Their Portfolio Companies
For investment companies, value creation includes protecting the capital already at work in their portfolio companies. Incorrect supplier payments, invoice fraud and gaps in counterparty checks can affect cash flow and confidence in the business.
By establishing common baseline controls and following up on exceptions, active owners can support risk management across their portfolio companies. The process should give management and boards clear information to prioritize action.
Risk Arises in Everyday Business Operations
An investment company can have good visibility into financial performance while lacking a consolidated understanding of how its portfolio companies verify suppliers and check payment details. Different accounting systems, processes and resources can lead to inconsistent controls.
The Swedish Police describe changed account numbers on invoices from recurring suppliers as one method used in invoice fraud. This illustrates why established supplier relationships also need checks when payment information changes.
For the owner, it is therefore useful to understand how companies identify these changes, who investigates them and what evidence is required before a payment is approved.
Establish a Common Baseline for Controls
A practical first step is to agree with portfolio company management on which controls should be in place and how they should be documented. These could include:
Verify the supplier’s identity and confirm that the supplier record, contract and invoice identify the correct legal entity.
Check relevant company information, such as registration status, tax registrations and sanctions screening results.
Independently verify new or changed payment details through a trusted contact channel before using them.
Review potential duplicates and unusual invoice amounts, and compare charges with the agreed terms.
Assign responsibility for investigation, decisions and follow-up when a control identifies an exception.
The depth of these checks should reflect the business and its exposure. A supplier with access to critical systems may need a more detailed assessment even when purchasing spend is low. Svenry’s guide to supplier risk classification explains how risk levels can be linked to appropriate controls and follow-up.
Monitor Counterparties Throughout the Holding Period
A review at acquisition provides a starting point for ongoing oversight. During the holding period, new suppliers may be added, companies may change ownership and payment instructions may change.
Combine scheduled reviews with checks triggered by changes to important information. Define which events require a new assessment and when an issue should be escalated to management or the board.
If several portfolio companies use the same supplier, a confirmed issue may justify asking the other companies to review the relationship. An ownership change or screening match needs to be investigated in context before conclusions are drawn.
An Example Involving Changed Bank Details
Suppose a portfolio company receives an email stating that an existing supplier has changed its bank account. An invoice is awaiting payment, and the sender asks for the change to be processed quickly.
With an established procedure, the finance team can pause the account update and contact the supplier using a previously verified telephone number. The check and the decision are documented before the new details are used.
If two people approve the same unverified information, the risk remains. Payment approval and verification of the supporting information should therefore be separate controls.
This example illustrates a control that an investment company can follow up across several holdings, while each portfolio company remains responsible for day-to-day execution.
Give the Investment Team Comparable Reporting
A common reporting structure can help the investment company identify where support is needed. One approach is to track a limited set of measures:
The proportion of active suppliers covered by the agreed controls.
The proportion of payment detail changes that have been verified and documented.
The number of material unresolved exceptions, including their age, owners and deadlines.
Completed actions and outstanding weaknesses from previous reviews.
Use consistent definitions and report the coverage of the controls. A low number of alerts may reflect few detected risks, but it may also mean that only a small part of the transaction flow is being checked.
Distinguish amounts flagged for review from confirmed payment errors or recovery claims. This provides a more useful basis for assessing the benefits of the actions taken.
Adapt Oversight to the Ownership Structure
Oversight should reflect the investment company’s ownership stake, mandate and agreed information sharing arrangements. In a controlled portfolio company, common processes can help coordinate the work. For minority holdings, board discussions and agreed reporting may be appropriate ways to support it.
For a new holding, an initial review of supplier records, payment procedures and unresolved exceptions can inform an action plan. In established holdings, follow-up can focus on changes and how previously identified weaknesses have been addressed.
Document who makes decisions locally and which events should be reported to the investment company. This clarifies how the owner can support the work and when additional action is needed.
How Svenry Can Help
Svenry helps organizations combine information from ERP and payment systems with relevant external data sources. Counterparty Risk supports ongoing checks of suppliers, customers and other business partners against sources including company registries and sanctions lists.
Fraud Detection analyzes invoice and transaction data to identify potential duplicates, unusual amounts and other signals that warrant review. The alerts give finance teams information to investigate and assess exceptions.
For investment companies, this offers a way to support ongoing controls within their portfolio companies. Combining technology with clear responsibilities and agreed reporting can help the investment team identify where its resources will be most useful.
