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Due Diligence Before Investing (Series: PE, VC and Hedge Funds De-Mystified)

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Due Diligence Before Investing (Series: PE, VC and Hedge Funds De-Mystified)

Private funds face strong challenges even before deploying their capital, but knowing when and where to source new investments requires an entirely different set of problem-solving skills. Professionals at private funds have to scrutinize target assets with quantitative and qualitative research and other due diligence. In this webinar, we discuss the performing due diligence from the perspective of private equity, venture capital and hedge fund professionals. This webinar also touches on the due diligence a potential investor in a private fund should do on the fund.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/due-diligence-investing-2019/

Private funds face strong challenges even before deploying their capital, but knowing when and where to source new investments requires an entirely different set of problem-solving skills. Professionals at private funds have to scrutinize target assets with quantitative and qualitative research and other due diligence. In this webinar, we discuss the performing due diligence from the perspective of private equity, venture capital and hedge fund professionals. This webinar also touches on the due diligence a potential investor in a private fund should do on the fund.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/due-diligence-investing-2019/

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Due Diligence Before Investing (Series: PE, VC and Hedge Funds De-Mystified)

  1. 1. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Insert the cover image for this webinar on this slide entirely 1
  2. 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  3. 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DISCLAIMER The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. About this PowerPoint: if you are looking at this PowerPoint without the benefit of listening to the conversation that surrounded it then you are doing yourself a disservice. This PowerPoint was prepared in contemplation of being viewed in conjunction with listening to a one hour webinar on the topic 3
  4. 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: Michele Itri – Tannenbaum, Helpern, Syracuse & Hirschtritt Panelists: Jonathan Friedland – Sugar Felsenthal Grais & Helsinger LLP Keith Bank – KB Partners David Lorry – Versa Capital Management LLC 4
  5. 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS WEBINAR: Due Diligence Before Investing Private funds face strong challenges even before deploying their capital, but knowing when and where to source new investments requires an entirely different set of problem-solving skills. Professionals at private funds have to scrutinize target assets with quantitative and qualitative research and other due diligence. In this webinar, we discuss the performing due diligence from the perspective of private equity, venture capital and hedge fund professionals. This webinar also touches on the due diligence a potential investor in a private fund should do on the fund. 5
  6. 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS SERIES: PE, VC, and Hedge Funds De-Mystified Many people are familiar with the terms private equity, venture capital and hedge fund, but few can actually define how each investment vehicle operates or makes money. Thanks to their seemingly complicated nature and lucrative reputations, the PE, VC and hedge fund industries occupy an almost mythic (and sometimes infamous) status for Americans. The combination of mystery and wealth creates a vacuum for misinformation and mistrust. This webinar series de-mystifies these private funds, explaining their similarities and differences from other investment vehicles and from each other- from the legal, financial, and investment mandate perspectives. 6
  7. 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 2/5/19 Episode #1: What is a “Private Fund?” 3/5/19 Episode #2: Basics of Fund Formation 4/9/19 Episode #3: Capital Raising 5/7/19 Episode #4: Due Diligence Before Investing 7 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  8. 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Episode #4: PE, VC, and Hedge Funds De-Mystified 8
  9. 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SOURCING AN INVESTMENT OPPORTUNITY • Deals are sourced through a variety of channels, depending on the firm: ✓ Internal analysis ✓ Networking ✓ Detailed research ✓ Cold-calling executives at attractive companies ✓ Financial intermediaries 9
  10. 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DUE DILIGENCE OF WHAT AND BY WHOM? 1 0 Of GP by prospective LPs Of potential portfolio investments by Fund
  11. 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LP DUE DILIGENCE OF GP 1 1
  12. 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PATERNALISTIC LAWS • Income and other requirements generally limit private fund investments to presumably sophisticated investors ✓ BUT… • Laws have been relaxed in recent years 1 2
  13. 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESEARCHING A FUND MANAGER • General, a fund manager must be registered with the SEC or a state securities commission as an investment adviser ✓ Larger advisers register with the SEC; smaller advisers generally register with the state securities commission in the state they are located • One can search for the manager on the SEC’s investment Adviser Public Disclosure website • Advisers registered with the SEC must complete a Form ADV, providing information about the business, ownership, clients, etc. 1 3
  14. 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESEARCHING A FUND MANAGER (cont’d) ➢ Important Data Points: • Mandate of fund • Manager’s bench ✓ Track record with other funds ✓ Other experience • Identity of service providers 1 4
  15. 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESEARCHING A FUND MANAGER (cont’d) • Valuation process/controls (mark-to-market; fair valuation; any third party review, approval) • Review of audited financial statements since inception • Review qualifications and unusual footnote • Evaluate quality/reputation of auditor • Evaluate quality/reputation of prime broker • Any changes to service providers? 1 5
  16. 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESEARCHING A FUND MANAGER (cont’d) • Identity of service providers • Organizational structure • Separation of responsibilities? • Independent checks? • Strong compliance function? • Third party marketing arrangements 1 6
  17. 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RESEARCHING A FUND MANAGER (cont’d) • How frequently does Manager test and verify the effectiveness of controls? • What are Manager’s reporting and communication procedures? • How quickly do issues get resolved? • Review of portfolio management systems • Robustness/location of redundancy systems ✓ Data storage ✓ Firewalls ✓ Disaster recovery 1 7
  18. 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERAL CHALLENGES WITH UNLISTED INVESTMENTS • Governance • Valuations and transfer pricing • Liquidity 1 8
  19. 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe RED FLAGS • Manager is applying pressure to make an investment immediately. • Manager guarantees a high return. • Manager encourages you to lie about your assets/income to meet the “accredited investor” test. • You cannot find information about manger on SEC website or through any state securities commission. 1 9
  20. 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CONFLICT OF INTEREST CONSIDERATIONS • Is the compliance function robust and independent? • Any related party transactions or use of affiliated broker or other service provider? • How are prime brokers and other service providers selected? • Side letters? How does the manager disclose the existence of side letters and types of terms that may vary? • Personal trading policies and procedures? Side-by-side trading/allocation procedures? • Error correction procedures? 2 0
  21. 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe FUND DUE DILIGENCE OF INVESTMENT OPPORTUNITIES 2 1
  22. 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SOURCING A PE INVESTMENT OPPORTUNITY 2 2
  23. 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe FUND DUE DILIGENCE OF INVESTMENT OPPORTUNITIES (cont’d) • Due diligence is (hopefully) a rigorous process that determines whether or not a fund will make an investment. • Frequently involves asking and answering a series of questions to evaluate the business and legal aspects of the opportunity. • Once the process is complete, the fund will use the outcomes of the process to finalize internal approval process and complete the investment. 2 3
  24. 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe CATEGORIES OF DILIGENCE • Business ✓ Management ✓ Customers ✓ Processes ✓ Competitors • Financial ✓ Accounting system ✓ Financial statements ✓ Debt 2 4 • Legal ✓ Contracts ✓ Litigation ✓ Other risks
  25. 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DILIGENCE IS “STAGED” 2 5 Funds do not have unlimited time & money Targets are shy
  26. 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EXEMPLAR PROCESS • NDA • Initial due diligence • First review with investment committee • Non-binding LOI or first round bid • Further due diligence with management • Building internal operating model • Preliminary investment memorandum • Final due diligence 2 6 • Update and final investment committee approval • Final binding bid • Closing conditions (which may include more due diligence)
  27. 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DILIGENCE IS INSTRUCTED BY FUND’S STRUCTURE • Investment philosophy? • Active or passive management? 2 7
  28. 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DUE DILIGENCE & PURCHASE AGREEMENTS 2 8 Due Diligence Reps/Warranties Indemnification Hold Backs Earn-Outs Litigation
  29. 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY 2 9
  30. 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Michele Itri – Itri@thsh.com Michele Itri is the Co-Chair of the Tax Law Practice at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Michele Itri’s practice focuses on the tax and legal aspects of investment funds, financial instruments, international transactions, corporate and real estate transactions. She works closely with clients to structure transactions to achieve that most favorable tax results. Her practice encompasses all aspects of federal, state, local and international taxation, with an emphasis on onshore and offshore investment funds, venture capital transactions, corporate acquisitions, financial instruments and real estate acquisitions and dispositions. Michele assists clients in the structuring of onshore and offshore investment funds (such as general equity funds, fund of funds, real estate funds, venture capital funds, distressed debt funds, arbitrage funds and global macro funds) and in the structuring and organization of private partnerships and limited liability companies (primarily investment management and real estate management companies and start- ups). She is a graduate of Harvard Law School (J.D.1998) and Colgate University (B.A.1995). 3 0
  31. 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Jonathan Friedland – jfriedland@sfgh.com Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply: to make money for clients whenever possible and to protect their interests at every turn. Licensed in four states, Jonathan’s transactional work focusses on representing private funds and other owners of private businesses, and the businesses they own. He regularly advises on M&A activities, structuring new ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School. He clerked for a federal judge before entering private practice and served for several years as an Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant treatises, several chapters in other treatises, and scores of articles on law and business. 3 1
  32. 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Keith Bank – keith@kbpartners.com Keith Bank is the founder and CEO of a sports/tech focused venture capital firm, KB Partners. He founded and serves on the Board of Directors of Club Champion Golf and was the past Chairman of SteadyMed Ltd. (NASDAQ:STDY). He also serves on the boards of Full Swing Golf, Phenix Real Time Solutions, ANGLR and Hammerhead and oversees the firm’s investments in MVPIndex, Fan Compass and Shape Matrix. Mr. Bank has been an active investor in various early stage and start-up technology companies in a wide variety of industries, including the sports, semiconductor, medical, real estate, consumer and information technology arenas. Mr. Bank previously co-founded and served on the Board and as President of MST Analytics, Inc., which was successfully sold to ATMI, Inc., a public company, in 1999. Before forming KB Partners, Mr. Bank was a Principal at Hiffman Shaffer Associates, Inc., a Chicago-based national real estate development, investment, management and brokerage firm. Other career highlights include co-founding a chain of deep discount drugstores, acquiring and completing a successful turnaround of a woman's apparel manufacturing and sales company, and procuring the equity and debt financing for and producing feature films Tommy’s Honour (BAFTA Scotland Award Winner for Best Feature Film) and Heaven Is a Playground. To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/keith-bank/ 3 2
  33. 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe David Lorry – dlorry@versa.com David S. Lorry is a Managing Director & Senior Counsel at Versa Capital Management, LLC in Philadelphia. Mr. Lorry has more than 20 years of business and legal experience advising clients in a range of industries, helping them solve a variety of business issues and execute business transactions. Mr. Lorry began his professional career as an attorney, practicing corporate, insolvency and commercial law for 7 years, after which he became an investment banker. Mr. Lorry has experience with bankruptcy, mergers and acquisitions, capital raising, commercial lending, general corporate transactions, and related matters. He received his undergraduate degree in from Duke University, cum laude, and earned his law degree from George Washington University National Law Center, with Honors. 3 3
  34. 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe QUESTIONS OR COMMENTS? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 3 4
  35. 35. The Investor’s Guide to Alternative Assets: The JOBS Act, “Accredited Investing,” and You. "The Investor's Guide to Alternative Assets: The JOBS Act, “Accredited" Investing, and You" provides a thorough, objective, and plain English introduction to investing in alternative assets. Chapters include overviews of angel investing and venture capital, private equity, hedge funds, and so-called "hard assets." An introduction to crowdfunding is included to help you decide whether investing via a crowdfunding portal is for you. Other topics discussed include the JOBS Act itself; "alternative mutual funds," and a host of others that will arm you with the information you need in order to make educated investment decisions. Available on Amazon Kindle and Financial Poise.com.
  36. 36. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 3 6 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.

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