Jason A. Scharfman

Private Equity Operational Due Diligence (eBook, ePUB)

Tools to Evaluate Liquidity, Valuation, and Documentation

• Format: ePub

Produktbeschreibung

A step-by-step guide to develop a flexible comprehensive operational due diligence program for private equity and real estate funds Addressing the unique aspects and challenges associated with performing operational due diligence review of both private equity and real estate asset classes, this essential guide provides readers with the tools to develop a flexible comprehensive operational due diligence program for private equity and real estate. It includes techniques for analyzing fund legal documents and financial statements, as well as methods for evaluating operational risks concerning valuation methodologies, pricing documentation and illiquidity concerns. * Covers topics including fund legal documents and financial statement analysis techniques * Includes case studies in operational fraud * Companion website includes sample checklists, templates, spreadsheets, and links to laws and regulations referenced in the book * Equips investors with the tools to evaluate liquidity, valuation, and documentation * Also by Jason Scharfman: Hedge Fund Operational Due Diligence: Understanding the Risks Filled with case studies, this book is required reading for private equity and real estate investors, as well as fund managers and service providers, for performing due diligence on the noninvestment risks associated with private equity and real estate funds.

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Produktdetails

• Verlag: John Wiley & Sons
• Seitenzahl: 400
• Erscheinungstermin: 28. Februar 2012
• Englisch
• ISBN-13: 9781118237472
• Artikelnr.: 37361294

Autorenporträt

JASON A. SCHARFMAN is a Managing Partner at Corgentum Consulting. He performs operational due diligence reviews of hedge funds, private equity, and real estate funds on behalf of institutional investors, pensions, high net worth individuals, and ERISA plans. Prior to forming Corgentum, he was the Director of Operational Risk at Graystone Research (Morgan Stanley). As Director, he was responsible for managing global operational risk assessment for all U.S., Asian, and European funds. His articles have appeared in Pension & Investments and FINAlternatives.com. He also teaches a course at New York University, has consulted with the U.S. House Judiciary Committee on the subject of hedge fund and private equity regulation, and provided training to financial regulators on the subject of hedge fund and private equity due diligence.

Inhaltsangabe

Preface xiii CHAPTER 1 Introduction to Private Equity Operational Risk 1
Introduction to Operational Risk 1 Operational Risk Compared to Operational
Due Diligence 3 What Is Operational Due Diligence? 4 Operational Due
Diligence in the Field of Private Equity 8 Operational Due Diligence as
Distinguished from Operational Management of Portfolio Companies 9 Timing
of Operational Due Diligence in the Investing Process 10 Operational Due
Diligence Process 13 Historical Perspectives of Private Equity Operational
Risk 16 Items Typically Covered during the Operational Due Diligence
Process 23 Core versus Expanded Operational Due Diligence Reviews 25 Shared
Commonalities between Private Equity and Real Estate Operations Risk 30
Differences in Operational Risk Factors between Private Equity and Real
Estate 32 Country- and Industry-Specific Risk Considerations 33 Investment
and Operational Due Diligence: Nexus or Blurred Lines? 39 Differences and
Similarities with Hedge Fund Operational Due Diligence 40 Notes 49 CHAPTER
2 Importance of Operational Due Diligence for Private Equity Funds 51
Understanding the Goals of the Operational Due Diligence Process 52 Common
Arguments against Operational Reviews of Private Equity Funds 55 Common
Arguments in Favor of Performing Operational Reviews of Private Equity
Funds 75 Conclusion 82 Notes 82 CHAPTER 3 Beginning the Operational Due
Diligence Review: Core Issues 85 Goal Self-Assessment 85 Designing an
Operational Due Diligence Program for Private Equity 87 When Does the
Operational Due Diligence Process Begin? 101 Signaling Effects of
Operational Flags 104 Requesting and Collecting Documentation 104
Nondisclosure and Confidentiality Agreements 106 Document Collection: What
Documents Should Investors Request? 113 Document Collection Negotiation
Techniques: Avoiding a Pass-the-Buck Environment 117 Document Collection:
Hard Copy or Electronic? 119 Fund Manager On-Site Due Diligence
Considerations 125 Key Risk Consideration Areas to Cover 128 Conclusion 133
Notes 133 CHAPTER 4 Additional Operational Due Diligence Considerations: An
Expanded Analysis 135 Core Issues versus Expanded Analysis 135 Compensation
Structures 138 Introduction to Private Equity Fund Fees 139 Manager
Investment in Funds 140 Evaluating Service Providers 141 Additional On-Site
Visit Considerations: Negative Operational Due Diligence 148 Additional
On-Site Visit Considerations: Interview Techniques and Question Design 150
Asset Raising and the Use of Placement Agents and Third-Party Marketers 159
Cash Management and Controls 162 Business Continuity and Disaster Recovery
165 Understanding the Trade Life Cycle Process 168 Legal, Compliance, and
Regulatory Risks 171 Insurance 173 Technology and Systems 174 Tax Practices
175 Diagnosing and Mitigating Reputational Risk 177 Conclusion 179 Notes
179 CHAPTER 5 Valuation Techniques, Methodologies, and Standards 181
Limited Partner Distinction between Fund Level and Portfolio Company
Valuation Approaches 181 Valuation Considerations for Newly Formed Funds
182 Introduction to Valuation 182 GIPS Statement on Private Equity 183 IPEV
Guidelines 185 FAS 157 189 Use of Third-Party Valuation Consultants 191
Valuation Output Process Documentation 194 Valuation Committee Review Scope
196 Additional Limited Partner Valuation Considerations 197 Conclusion 197
Notes 198 CHAPTER 6 Legal Due Diligence 199 Operational Due Diligence
Specialists versus Generalists 199 Common Private Equity Fund Structures
201 Understanding the Private Placement Memorandum 201 Common Document Risk
Assignment Terms 206 Exculpation and Indemnity 206 Trends in
Indemnification and Exculpation Clauses 217 Other Legal Documents
Considerations 227 Conclusion 228 Notes 228 CHAPTER 7 Financial Statement
Due Diligence 233 Audit Standards 233 Accounting Standards 235 Other
Financial Statement Formats 237 Considerations That Are Unique to Private
Equity and Real Estate Financial Statements 241 Understanding Financial
Statement Sections 244 Other Financial Statement Sections 245 Understanding
FAS 157 251 Conclusion 254 Notes 254 CHAPTER 8 Distinguishing the Assets
Class: Real Estate-Specific Concerns 257 Real Estate Trade Flow Process 257
Sample Real Estate Process 258 Real Estate Valuation 262 Monitoring
Conflicts of Interest 266 Fraud Considerations: Mortgage Fraud and
Straw-Man Borrowers 269 Understanding Real Estate Fund Fees 270 Property
Holdings Legal Considerations 271 Conclusion 272 Note 273 CHAPTER 9 Putting
It All Together: Asset Allocation and Ongoing Monitoring 275 Incorporating
the Results of Operational Due Diligence into Asset Allocation 276
Evolution of Minimum Operational Risk Regime (MORR) 283 Operational Risk
Correlations to Portfolio Transaction Frequency 285 Operational
Lift-to-Drag Ratio 286 Negotiating Private Equity Side Letters 290 Ongoing
Monitoring: Operational Due Diligence Monitoring for Private Equity Funds
292 Conclusion 296 Appendix: Mathematical Conepts 297 The Derivative 297
The Chain Rule 298 The Second Partial Derivative Test 299 Notes 300 CHAPTER
10 Boards, Committees, and Activism 301 Private Equity Fund Advisory Boards
301 Different Types of Advisory Boards: Limited Partners versus Pure
Advisors 302 Ongoing Operational Due Diligence Monitoring Advisory Benefits
303 Balancing the Role of Inner Circle versus Broadly Representative
Advisory Boards 305 Advisory Board Criticisms: Crowding Out, Power
Aggregation, and Redundant Board Layers 306 Information Flow Considerations
from Underlying Portfolio General Partner to Limited Partners 307 Limited
Partner Due Diligence Considerations for a Private Equity Fund of Funds 308
Additional Private Equity Advisory Board Considerations 311 Conclusion 313
Notes 313 CHAPTER 11 Case Studies and Scenarios 315 Case Studies 315
Hypothetical Scenarios 326 Notes 335 CHAPTER 12 Trends and Future
Developments 341 Use of Third-Party Administrators 341 Increased Focus on
Material Nonpublic Information in the United States 345 Increased Reliance
on Audit-Type Certifications 348 Increased Use of Operational Due Diligence
Consultants 350 Pooling Operational Due Diligence Resources among Multiple
LPs 352 Operational Benchmarking 353 ILPA Guidelines 354 From
Self-Regulation to Mandatory Registration 355 Impact of Dodd-Frank on
Operational Due Diligence 356 Conclusion 357 Notes 358 About the Author 359
About the Website 361 Index 363