The Outsourced Chief Investment Officer Model: One Size Does Not Fit AllCallan
As investors reach for returns in a sometimes bruising market, they are adding private equity, hedge funds,
and other alternatives, leading to increasingly sophisticated—and complicated—portfolio monitoring and
management. Heightened regulatory and compliance requirements have further increased the time and
resources required to meet fiduciary responsibilities. This has led some investors to consider delegating
investment oversight, monitoring, and management duties.
The industry press regularly reports on a large and rapidly growing outsourced chief investment officer
(OCIO) market, and some fund sponsors wonder if this model would serve them better than the traditional consulting model. Funds managed through an OCIO are beholden to the same challenging market environment and regulatory atmosphere, but the burden of balancing these challenges can be largely shifted from the investment committee to the OCIO provider. Some funds find this solution meets their needs.
In the outsourced chief investment officer (OCIO) model (also known as “implemented consulting,”
“discretionary consulting,” or “delegated consulting”), an institution shifts discretionary authority to an
advisory firm to manage some or all of the investment functions typically performed by the investment committee. The precise definition of this model varies as much as the name, making the size and scope of the marketplace difficult to pin down.
The increasing popularity of this model is in part a response to the frustration investment committees
have felt amid a shifting environment in which portfolio management requires more resources. While an OCIO offers an elegant solution, it is not a panacea for all the issues facing institutional investors, and relinquishing all fiduciary oversight is not an option.
In this paper we describe the OCIO market and Callan’s approach, which acknowledges that each investor faces unique challenges that require custom solutions. We offer two case studies and a series of questions that might assist fund sponsors in weighing the appropriateness of the OCIO model for their fund.
According to results of Callan Associates’ 2013 Risk Management Survey, more than half of fund sponsors (55%) say their risk management tools are effective at mitigating investment risk, but 14% see them as simply a means to improve risk identification and monitoring. One-third of respondents indicated they do not know yet the effectiveness of their risk management tools because they are new and untested in a true market crisis.
The survey found formal risk management processes are most prevalent at large funds. Half of the medium and small funds have adopted a risk management process or are doing so in 2013. Forty-two percent of respondents employ proprietary and/or third-party risk measurement tools, such as software or data services. Usage of third-party tools is most prevalent at public funds, while endowments and foundations more often use in-house (proprietary) tools.
Corporate and public funds are embracing policy-level approaches to risk management more so than endowments and foundations. Public funds have implemented economic regime asset allocations, risk parity, and risk factor-based asset allocations, while corporate funds favor liability-driven investing and funded status-based glide path de-risking.
Strategy-level approaches to mitigate risk are easier to implement than those that alter the fund’s overall investment policy, and Callan observed higher levels of adoption of strategy changes across fund types. Public funds and foundations and endowments are most heavily implementing or considering real assets, opportunistic fixed income, absolute return and long/short equity. Corporate funds are also embracing absolute return, but long duration is the most favored strategy-level approach used to address risk.
Many fund sponsors wrestle with whether or not to tactically manage plan risk. Only 30% of sponsors have made rebalancing decisions based on risk management findings. Of those that have not done so, 82% do not plan to in the future.Public (31%) and large (25%) funds are the most likely to use tactical implementations going forward.
According to the survey, most funds (94%) do not have a formal risk budget, but explicitly address risk management in their plan governance via asset allocation, investment objectives and disciplined rebalancing.
The investment committee is the body most regularly tasked with deciding when to take action based on the findings of risk management tools. The most common actions taken were asset allocation changes (64% of respondents), manager due diligence/search (56%) and increased manager monitoring (52%). Twenty percent of respondents had not yet taken any actions based on risk management findings.
The survey was conducted in November 2012 and includes responses from 53 fund sponsors representing $576 billion in assets.
The Outsourced Chief Investment Officer Model: One Size Does Not Fit AllCallan
As investors reach for returns in a sometimes bruising market, they are adding private equity, hedge funds,
and other alternatives, leading to increasingly sophisticated—and complicated—portfolio monitoring and
management. Heightened regulatory and compliance requirements have further increased the time and
resources required to meet fiduciary responsibilities. This has led some investors to consider delegating
investment oversight, monitoring, and management duties.
The industry press regularly reports on a large and rapidly growing outsourced chief investment officer
(OCIO) market, and some fund sponsors wonder if this model would serve them better than the traditional consulting model. Funds managed through an OCIO are beholden to the same challenging market environment and regulatory atmosphere, but the burden of balancing these challenges can be largely shifted from the investment committee to the OCIO provider. Some funds find this solution meets their needs.
In the outsourced chief investment officer (OCIO) model (also known as “implemented consulting,”
“discretionary consulting,” or “delegated consulting”), an institution shifts discretionary authority to an
advisory firm to manage some or all of the investment functions typically performed by the investment committee. The precise definition of this model varies as much as the name, making the size and scope of the marketplace difficult to pin down.
The increasing popularity of this model is in part a response to the frustration investment committees
have felt amid a shifting environment in which portfolio management requires more resources. While an OCIO offers an elegant solution, it is not a panacea for all the issues facing institutional investors, and relinquishing all fiduciary oversight is not an option.
In this paper we describe the OCIO market and Callan’s approach, which acknowledges that each investor faces unique challenges that require custom solutions. We offer two case studies and a series of questions that might assist fund sponsors in weighing the appropriateness of the OCIO model for their fund.
According to results of Callan Associates’ 2013 Risk Management Survey, more than half of fund sponsors (55%) say their risk management tools are effective at mitigating investment risk, but 14% see them as simply a means to improve risk identification and monitoring. One-third of respondents indicated they do not know yet the effectiveness of their risk management tools because they are new and untested in a true market crisis.
The survey found formal risk management processes are most prevalent at large funds. Half of the medium and small funds have adopted a risk management process or are doing so in 2013. Forty-two percent of respondents employ proprietary and/or third-party risk measurement tools, such as software or data services. Usage of third-party tools is most prevalent at public funds, while endowments and foundations more often use in-house (proprietary) tools.
Corporate and public funds are embracing policy-level approaches to risk management more so than endowments and foundations. Public funds have implemented economic regime asset allocations, risk parity, and risk factor-based asset allocations, while corporate funds favor liability-driven investing and funded status-based glide path de-risking.
Strategy-level approaches to mitigate risk are easier to implement than those that alter the fund’s overall investment policy, and Callan observed higher levels of adoption of strategy changes across fund types. Public funds and foundations and endowments are most heavily implementing or considering real assets, opportunistic fixed income, absolute return and long/short equity. Corporate funds are also embracing absolute return, but long duration is the most favored strategy-level approach used to address risk.
Many fund sponsors wrestle with whether or not to tactically manage plan risk. Only 30% of sponsors have made rebalancing decisions based on risk management findings. Of those that have not done so, 82% do not plan to in the future.Public (31%) and large (25%) funds are the most likely to use tactical implementations going forward.
According to the survey, most funds (94%) do not have a formal risk budget, but explicitly address risk management in their plan governance via asset allocation, investment objectives and disciplined rebalancing.
The investment committee is the body most regularly tasked with deciding when to take action based on the findings of risk management tools. The most common actions taken were asset allocation changes (64% of respondents), manager due diligence/search (56%) and increased manager monitoring (52%). Twenty percent of respondents had not yet taken any actions based on risk management findings.
The survey was conducted in November 2012 and includes responses from 53 fund sponsors representing $576 billion in assets.
A whitepaper making the case for, and suggesting a model for, the creation of an investment bank focused on the social venture space in Canada. Many of the ideas are applicable outside of Canada as well.
How Banks will Generate Revenue on Payments and Checking in the New EraDavid Kerstein
Presentation at the BAI Payments Connect Conference, March, 2010. Survey of bankers to understand implications of new changes in Reg E, impact on earnings, and future changes in Checking Account revenue.
Financial Times -2010 Fund Image Summary Of FindingsDaniel Rothman
Measuring the standing and profile of 24 leading asset management companies among US financial intermediaries.
Conducted by the FT Global Research team.
All the efforts of policymakers to institute more regulations has reshaped the private equity landscape adding yet more pressure on returns. With profit margins squeezed, PEs must focus on operational excellence and appropriate levels of transparency to achieve and maintain a competitive advantage.
At SGC Partners, we are enthusiastic about the future of the private equity industry. We look forward to continuing to work alongside the industry and support its efforts to enhance well-being for all stakeholders.
Private Equity Due Diligence - Think OperationalRamkumar ,PMP
Operational due diligence is critical to identify the areas of improvement such as purchasing, supply chain and sales in order to buy a target company. HCL can support operating partners in conducting through due diligence and help them in making a correct buying/investment decision
Hedge Fund Due Diligence: Resources to Help Investors Better Understand Their...HedgeFundFundamentals
In light of recent changes brought forth by the new rules adopted by the Securities and Exchange Commission (SEC) implementing the Jumpstart our Business Startups (JOBS) Act, this presentation is designed as an educational tool with basic information about who can invest in hedge funds as well as some potential red flags regarding investment fraud.
Watch full webinar here: http://www.firmex.com/Due-Diligence-Best-Practices-and-Pitfalls-sign-up/
LOIs and NDAs signed. Now art meets science with the legal, financial and strategic review of the business. How do you test the value proposition and identify potential risks? Select the best tools to streamline the process? And prepare for regulatory and legal compliance issues arising from legislation like FCPA? Learn what it takes to avoid pitfalls that plague even the most experienced due diligence experts.
This presentation gives an in-depth look at the comprehensive due diligence process. It covers the framework for due diligence, its purpose, and types. This presentation is incrediably valuable for anyone doing or looking to do transactional work.
Porter's Generic Strategies with examplesdipalij07
This Presentation is containing brief description of generic strategies with examples of companies in detail....
Hope it will be helpful to everybody....
Enjoy...!! :)
A whitepaper making the case for, and suggesting a model for, the creation of an investment bank focused on the social venture space in Canada. Many of the ideas are applicable outside of Canada as well.
How Banks will Generate Revenue on Payments and Checking in the New EraDavid Kerstein
Presentation at the BAI Payments Connect Conference, March, 2010. Survey of bankers to understand implications of new changes in Reg E, impact on earnings, and future changes in Checking Account revenue.
Financial Times -2010 Fund Image Summary Of FindingsDaniel Rothman
Measuring the standing and profile of 24 leading asset management companies among US financial intermediaries.
Conducted by the FT Global Research team.
All the efforts of policymakers to institute more regulations has reshaped the private equity landscape adding yet more pressure on returns. With profit margins squeezed, PEs must focus on operational excellence and appropriate levels of transparency to achieve and maintain a competitive advantage.
At SGC Partners, we are enthusiastic about the future of the private equity industry. We look forward to continuing to work alongside the industry and support its efforts to enhance well-being for all stakeholders.
Private Equity Due Diligence - Think OperationalRamkumar ,PMP
Operational due diligence is critical to identify the areas of improvement such as purchasing, supply chain and sales in order to buy a target company. HCL can support operating partners in conducting through due diligence and help them in making a correct buying/investment decision
Hedge Fund Due Diligence: Resources to Help Investors Better Understand Their...HedgeFundFundamentals
In light of recent changes brought forth by the new rules adopted by the Securities and Exchange Commission (SEC) implementing the Jumpstart our Business Startups (JOBS) Act, this presentation is designed as an educational tool with basic information about who can invest in hedge funds as well as some potential red flags regarding investment fraud.
Watch full webinar here: http://www.firmex.com/Due-Diligence-Best-Practices-and-Pitfalls-sign-up/
LOIs and NDAs signed. Now art meets science with the legal, financial and strategic review of the business. How do you test the value proposition and identify potential risks? Select the best tools to streamline the process? And prepare for regulatory and legal compliance issues arising from legislation like FCPA? Learn what it takes to avoid pitfalls that plague even the most experienced due diligence experts.
This presentation gives an in-depth look at the comprehensive due diligence process. It covers the framework for due diligence, its purpose, and types. This presentation is incrediably valuable for anyone doing or looking to do transactional work.
Porter's Generic Strategies with examplesdipalij07
This Presentation is containing brief description of generic strategies with examples of companies in detail....
Hope it will be helpful to everybody....
Enjoy...!! :)
Researchbytes.com conducts survey of fund managers and analysts to assess the...pritishchawla
The survey, concluded that a whopping 73% of the respondents see no change in the housing major's perception. Conducted by Researchbytes.com - India's leading platform that connects companies with institutional investors - had a sample size of 361 fund managers and both buy side and sell side analysts.
Importantly 48% of the respondents were comfortable with HDFC's accounting practices if they are within the stipulated norms while 44% expected HDFC to be more conservative in its accounting process.
In its June 14 report, Macquarie had blamed HDFC for adopting aggressive accounting practices in the last two years by passing provisioning through reserves and also making the adjustments for zero-coupon bonds through reserves. It had also downgraded HDFC to underperform and cut target price by 30% to 550 rupees.
The report further said that earnings for FY11 and FY12 were overstated by 38% and 24% respectively and return on equity would have been 600 and 400 basis points lower at 16% and 18% respectively if the adjustments had been made through the profit and loss account.
HDFC management had strongly denounced the report and accused Macquarie analysts of neither meeting the company officials nor verifying facts.
The survey further showed that 64% of the respondents felt that Macquarie's views on HDFC were partly justified while 10% felt that the research house was fully justified in its views. A sizeable 26% felt that the views were not at all justified.
The respondents were almost evenly split on the issue of corporate governance. 52% respondents felt that best corporate governance practices should be more aligned with shareholder interests while 48% were of the opinion that they should be aligned with accounting standards.
Wednesday, HDFC announced a 19% jump in its net profit for the Apr-Jun quarter at 10.02 blnrupees compared with 8.45 bln rupees a year ago on the back of rising loan disbursals for individuals.
Thursday, shares of HDFC closed at 675.85 rupees. In the one-month since the publication of Macquarie report, HDFC shares have not been hit and continued to trade well above 600 rupees.
On the day of the report, HDFC shares had closed at 633 rupees and have thus gained nearly 43 rupees.
Corporate Governance Trends, Regulatory Changes & their Impact on Investment ...OTC Markets Group Inc.
This webinar focuses on a discussion regarding how changes in corporate governance approached by the institutional investor communities can impact international investor relations strategies for global companies. Learn practical advice on how the corporate governance approach of institutional investors can impact your investor targeting goals. You can view a recording of the webinar here: https://youtu.be/bkC2Wb3lo5Y
Regulatory and Investment Change: The Client’s ViewComPeer Limited
ComPeer has undertaken research with 1,000 affluent and high net worth investors to determine the effect of changing regulation, principally RDR, on the relationships with their wealth managers and advisers.
This research answers some important questions - do clients understand the changes, are they aware of changes to fee structures and advice, is advice still accessible, have their investment preferences changed?
Institutional investors are always looking for better ways to increase returns, reduce risk and achieve specific investment goals. Particularly in the wake of the financial crisis, investors have been seeking more robust ways to diversify and reduce risk.
FTI Consulting publie cette semaine une étude globale sur le thème de l’activisme actionnarial, disponible en pièce jointe de ce message.
FTI Consulting a interrogé plus de 100 investisseurs institutionnels, représentant collectivement plus de 1 700 milliards de dollars d’actifs sous gestion, sur leur perception des campagnes activistes.
Cette étude démontre que les investisseurs institutionnels sont de plus en plus favorables aux activistes, et qu’ils soutiennent plus facilement la nomination d’administrateurs indépendants au sein des conseils d'administration.
Plus de la moitié des sociétés de gestion interrogées a indiqué qu'au moins 15% des sociétés actuellement présentes dans leur portefeuille « pourraient bénéficier » d'une situation activiste. Considérant que les activistes ciblent publiquement, ou non, des centaines d'entreprises par an, ce ratio confirme l’ampleur du mouvement. La tendance actuelle devrait se poursuivre.
D’autre part, si les entreprises ont une meilleure approche et une meilleure gestion des campagnes activistes, l’enquête menée par FTI Consulting démontre que leur efficacité peut être encore augmentée. La condition préalable est de reconnaître que les investisseurs institutionnels soutiennent alors un «changement» stratégique de l’entreprise sans pour autant s’intéresser aux moyens d’y parvenir.
FTI Consulting peut ainsi contribuer à élaborer une communication transparente avec les investisseurs, mettant en valeur les changements entrepris par la société et démontrant la création de valeur à long terme, et ainsi se défendre efficacement contre les fonds activistes.
La division Strategic Communications de FTI Consulting est l'une des plus réputées au monde, avec plus de 25 ans d'expérience dans le conseil auprès des équipes dirigeantes dans le cadre de situations sensibles. Pour ses clients, FTI active les leviers de communications pour protéger et améliorer réputation et valeur d'entreprise.
N'hésitez pas à nous contacter pour plus d'informations.
L'équipe FTI Consulting
The results suggest that there is a real opportunity to improve the investment process so nonprofits can better protect the capital they’ve worked so hard to raise. I hope you find the results as interesting as I did. Please feel free to reach out to me directly if you have questions.
Charity Navigator's CEO Debates Hudson Institute Director on the Realities of...CharityNav
Ken Berger's slides from his debate with William Schambra (Director of the Bradley Center for Philanthropy and Civic Renewal at The Hudson Institute) at the Grants Managers Network Annual Conference. The debate centered on the realities of ranking charities.
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Originally posted at the hedge fund operational due diligence blog www.Corgentum.com/blog an overview of FAS 157 reclassification and negotiation between hedge funds and auditors
LA HUG - Video Testimonials with Chynna Morgan - June 2024Lital Barkan
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2. THE RISE OF PRIVATE EQUITY
OPERATIONAL DUE DILGIENCE
INTRODUCTION: STUDY APPROACH:
Private equity has been in the news recently To analyze Limited Partner attitudes and
of late. With U.S. presidential candidate Mitt trends with regard to performing
Romney's past experiences at Bain Capital, it operational due diligence reviews of private
has focused the U.S. discussion on the social equity funds, Corgentum Consulting
and economic benefits of private equity conducted a survey of approximately 150
including its effect on job creation. Limited Partners globally. The types of
Regardless of any social or political investors included in this study covered a
criticisms, investors continue to invest in diverse cross section of private equity
private equity funds. As allocations to investors ranging from ultra-high net worth
private equity funds continues to increase, individuals to larger institutional investors.
so too does the level of scrutiny investors The one requirement to be included in this
incorporate into this process. study was that the investors had either
current investments in private equity, or had
Spurred perhaps by developments in other made an allocation to private equity within
parts of the alternative investment the past five years.
spectrum, most notably hedge funds,
investors have begun to look inward and
expand the scope of their own due diligence
processes. This study seeks to evaluate
investor trends in performing operational
due diligence on their private equity
investments. Operational due diligence
refers to the process of analyzing
operational risks. Operational risks can be
thought of in part, as those risks that are not
purely investment related in nature and
arise from the daily management and
business operations of the fund. These
operational risks run the gamut from
traditional back office trade operations to
counterparty and compliance related risks.
2|Page
3. THE CURRET LANDSCAPE:
Current performance of operational due diligence
Do you currently perform any operational due
diliegnce on fund managers?
13%
Yes 87%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
To analyze Limited Partner attitudes and conducted operational due diligence on fund
trends with regard to performing managers. As indicated above, the results
operational due diligence reviews, Limited indicate that the overwhelming majority,
Partners were first asked if they currently 87%, currently perform some sort of
operational due diligence.
CURRENT OPERATIONAL DUE DILIGENCE APPROACHES :
How do you perform operational due diligence?
Combination of internal and external resources 14%
Consultants 24%
Internally 62%
0% 10% 20% 30% 40% 50% 60% 70%
Those Limited Partners that indicated that therefore, were not dedicated to
they currently perform operational due operational due diligence alone. 24% of
diligence were next asked how they perform investors responding indicated that they
this function. As outlined above, the bulk of utilize consultants. Within the consultants
investors, 62%, currently perform category, investors indicated an increase in
operational due diligence internally. the use of third-party operational due
diligence consultants. However, in general,
Those Limited Partners that performed the consultants which provided operational
operational due diligence internally further due diligence also provided investment
indicated that the majority of the employees advice. Finally, 14% of respondents indicated
responsible for overseeing operational due that they perform operational due diligence
diligence had other responsibilities through a combination of a variety of
(including investment analysis duties) and internal and external resources.
3|Page
4. OPERATIONAL RISK ATTITUDES:
Private equity compared to hedge funds
Which do you view as having more operational
risks - hedge funds or private equity?
Private equity 16%
Hedge funds 84%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
Investors were next asked about their Respondents clarified that reasons for this
opinion regarding the overall operational included hedge funds more frequent trading
riskiness of hedge funds as compared to activity as compared to private equity funds,
private equity funds. As outlined above, an the increased attention from regulators on
overwhelming 84% of investors indicated insider trading activity and recent hedge
that they viewed hedge funds as having fund related frauds such as Bayou and
more operational risks as compared to Madoff.
hedge funds.
Resource allocation of operational due diligence to hedge funds versus private equity -
Do you perform operational due diligence only on
hedge funds (and not private equity funds)?
No (on hedge funds and other funds including private
26%
equity)
Yes (only on hedge funds and not private equity) 74%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Those respondents that indicated they that they only perform such reviews on
currently performed operational due hedge funds and not private equity funds.
diligence, were then asked about whether This response agrees with the respondents
they performed operational due diligence previous responses that they view hedge
reviews of their hedge fund investments and funds as being riskier, and therefore
not their private equity fund investments. A requiring more operational due diligence, as
vast majority, 74% of respondents, indicated opposed to private equity funds.
4|Page
5. Do you currently perform operational due
diligence on private equity funds?
No 32%
Yes 68%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Of those 26% of investors that indicated currently perform operational due diligence
they performed operational due diligence on on private equity funds as well. As outlined
other funds in addition to hedge funds - above 68% of those in that group indicated
these respondents were asked if they that that they did perform such reviews.
ATTITUDES TOWARDS PRIVATE EQUITY OPERATIONAL DUE DILIGENCE
Why do you not perform operational due diligence
reviews of private equity funds?
Others 4%
Do not feel necessary going forward 11%
I want to, but unsure how 16%
Unsure of benefits 12%
Have not previously in the past 57%
0% 10% 20% 30% 40% 50% 60%
Those respondents that indicated that they 12% of investors were unsure as to the
did not perform operational due diligence benefits of performing such reviews, while
on private equity funds, but did perform 16% indicated that they wanted to perform
such reviews on hedge funds (i.e.- 74% of such reviews but were unsure how to
those that indicated Yes), were asked about proceed. 11% of respondents stated that
their reasons for not performing such they do not feel private equity poses risks
private equity reviews. A majority of which make such reviews necessary going
respondents, 57%, indicated that they had forward. Finally, 4% indicated other reasons
simply not performed such reviews in the for not performing such reviews including a
past and therefore, had not changed their lack of resources and a belief that
previous procedures. government regulation supplants the need
for such reviews.
5|Page
6. ANTICIPATION OF FUTURE TRENDS IN OPERATIONAL DUE DILIGENCE RESOURCE ALLOCATION
Do you anticipate starting to perform
operational due diligence reviews in the coming
year?
No 32%
Yes 68%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Additionally, those 74% that responded they Investors indicated that the reasons for
did not perform operational due diligence likely starting to perform such reviews
on private equity funds but did perform such includes a focus on performing a minimum
reviews on hedge funds, were further asked amount of due diligence across all types of
if they anticipated performing such investments across their portfolios,
operational risk review on private equity in increased pressure to perform such reviews
the coming year. As outlined above, 68% of from individuals that they manage money on
them indicated they did anticipate starting behalf of and increasing concerns about
to perform such reviews in the coming year. private equity risks in general.
6|Page
7. OPINIONS REGARDING IMPORTANT PRIVATE EQUITY OPERATIONAL RISKS
What do you feel is the most important private
equity operational risk?
Others 4%
Role of board of directors 6%
Counterparty risk 8%
Fraud 9%
Traditional back office processes 17%
Compliance / Governance 22%
Valuation 34%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Regardless of whether or not investors counterparty risk was the most important
indicated that they performed private equity operational risk, while 6% indicated that the
operational due diligence reviews, role of the board of directors was the most
respondents were asked what they felt were important risk. 4% of respondents indicated
the most that they felt other risks were
important private the most important, including
equity operational the compensation of the fund
risks. The majority, manager, legal documentation
34% of investors, risk, service providers and
stated that they insurance coverage.
believe that
valuation was the Further clarifying their
largest operational responses, investors indicated
risk in private that in determining which
equity. This was followed by, 22% of operational risk factors were the most
respondents who indicated that they felt important, they were influenced in part by
Compliance / Governance was the largest the occurrence of recent events where funds
operational risk. 17% indicated that had failed for primarily operational related
traditional back office procedures posed the reasons including fraudulent activity,
largest operational risk to private equity. valuation concerns and counterparty risk.
These responses, confirmed by the data,
Interestingly, investors next indicated that suggest the continued presence of a so-
concerns still persist related to fraudulent called Madoff Effect across not only hedge
activity; with 9% of respondents indicating funds, but private equity as well, whereby
that fraud was the most important private investors tend to tailor their approach
equity operational risk. 8% of respondents towards due diligence based on recent
felt that fraudulent activity.
7|Page
8. CONCLUSION
The state of operational due diligence is in flux. Private equity Limited Partners are increasingly
accepting the need to perform these types of operational risk reviews. Additionally, private
equity investors are broadening the scope and depth of such operational risk reviews. In
summary, the results of this survey indicate:
The majority of investors, 87% currently perform operational due diligence reviews of
fund managers
Investors are currently allocating the bulk of their operational due diligence efforts
towards hedge funds as opposed to private equity, but there is an increasing sentiment
among investors to change this
Limited Partners anticipate performing more operational due diligence on private equity
then they did in the past :
- Approximately 50% of respondents indicated that they anticipate starting to
perform such reviews in the coming year
- 16% indicated that they want to implement operational due diligence programs
in the future
In regards to operational risks, Private equity Limited Partners are most focused on
valuation and compliance related risks
Limited Partners are still concerned with the potential for fraud in private equity:
- 9% think it's the most important operational risk
The presence of a Madoff Effect is not only applicable to hedge funds but extends to
influence investor opinions of private equity operational due diligence as well.
Operational risk evaluations will continue to remain an important part of the private equity
investing process. Investors looking to develop or refine their operational due diligence program
may consider working with a third-party operational due diligence consultant such as Corgentum,
to assist in this process to ensure all operational risks are fully vetted.
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9. ABOUT CORGENTUM CONSULTING
Corgentum Consulting is a specialist consulting firm which performs operational due diligence
reviews of fund managers. The firm works with investors including fund of funds, pensions,
endowments, banks and family offices to conduct the industry's most comprehensive operational
due diligence reviews. Corgentum's work covers all fund strategies globally including hedge
funds, private equity, real estate funds, and traditional funds. The firm's sole focus on
operational due diligence, veteran experience , innovative original research and fundamental
bottom up approach to due diligence allows Corgentum to ensure that our client's avoid
unnecessary operational risks. Corgentum's Managing Partner, Jason Scharfman, is the author of
the forthcoming Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation
and Documentation. The Web site is http://www.corgentum.com.
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