PE LP's Are Utilizing Operational Due Diligence to Make Their Voices Heard


Published on

Originally posted in the August 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

Published in: Education
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

PE LP's Are Utilizing Operational Due Diligence to Make Their Voices Heard

  1. 1. PE LPs Are Utilizing Operational Due Diligence toMake Their Voices HeardIncreasingly, private equity investors, commonly referred to as Limited Partners or LPs, are performingoperational due diligence prior to allocating to private equity funds. It is good to see that LPs have takencues from their hedge fund counterparts, and are increasingly recognizing that private equity fundspresent just as many, if not more, operational risks to investors as compared to hedge funds.Unfortunately, private equity fund managers, commonly referred to as General Partners or GPs, havebeen slower than their hedge fund portfolio manager counterparts in listening to LP feedback. This is tobe expected as GPs have long capitalized on the long-term nature of private equity investing to insulatethemselves from frequent interaction with LPs.In the past, after an LP committed capital, there were little if any updates from GPs outside ofprescheduled updates, generally quarterly, on portfolio performance. Such an arrangement haseffectively robbed LPs of their voice as partners in the investing process. More LPs have come toacknowledge this fact, and are increasingly pro-actively sharing feedback with GPs after the initial andongoing operational due diligence processes.So consider for example, an LP who is considering making an investment in a private equity fund. This LPhas wisely decided to perform operational due diligence on the GP. After the review, the LP has a list ofseveral operational deficiencies and areas in which the LP feels compared to their peers the GP couldimprove.Continuing our example, let us assume that from the LPs perspective none of these items are so seriousas to preclude him from investing, but rather he would feel more comfortable if the GP took correctiveaction on these matters. At a minimum, the LP feels it is important to make the GP aware of theseissues.While previously a GP may have politely listened to such feedback and taken little corrective action,more LPs are increasingly monitoring how well GPs respond to this feedback. This includes performingongoing operational due diligence to both monitor process improvements, as well as to detect any newoperational risks.Clinging to their old ways, however, many GPs arent frankly interested in this ongoing LP operationaldue diligence process or receiving any such feedback from LPs that have already committed capital. Tofacilitate this lack of dialogue, GPs utilize a structure whereby they have so-called advisory boards uponwhich typically sit the largest investors in a particular fund. As such, smaller LPs effectively becomesqueezed out of the process. More LPs are beginning to realize the flaws in such arrangements and havedecided to become proactive not only in their due diligence efforts, but in engaging with GPs in morefrequent dialogues concerning both investment and operational issues.
  2. 2. A program of initial and ongoing operational due diligence for private equity can help ensure that an LPdetects operational issues before committing capital, and is alerted to any new potential problemsbefore they spin out of control. As this trend continues, LPs that do not engage in such programs mayincreasingly find themselves to be the exception rather than the norm.Originally posted in the August 2012 edition of Corgentum Consultings Operational Due DiligenceInsights.For More info@corgentum.comInformation | Blog | Twitter Feed Tel. 201-360-2430About Corgentum Consulting:Corgentum Consulting is a specialist consulting firm which performs operational due diligencereviews of fund managers.The firm works with investors including fund of funds, pensions, endowments, banks ultra-high net-worth individuals, and family offices to conduct the industrys most comprehensive operational duediligence reviews. Corgentums work covers all fund strategies globally including hedge funds, privateequity, real estate funds, and traditional funds. The firms sole focus on operational due diligence,veteran experience, innovative original research and fundamental bottom up approach to duediligence allows Corgentum to ensure that the firms clients avoid unnecessary operational risks. ©2012 Corgentum Consulting, LLC