Private Equity Operational Due Diligence, + Website: Tools to Evaluate Liquidity, Valuation, and Documentation

447 Pages·2012·3.75 MB·English

Contents
Cover
Series
Title Page
Copyright
Dedication
Preface
CHAPTER 1: Introduction to Private Equity
Operational Risk
INTRODUCTION TO OPERATIONAL RISK
OPERATIONAL RISK COMPARED TO OPERATIONAL
DUE DILIGENCE
WHAT IS OPERATIONAL DUE DILIGENCE?
OPERATIONAL DUE DILIGENCE IN THE FIELD OF
PRIVATE EQUITY
OPERATIONAL DUE DILIGENCE AS DISTINGUISHED
FROM OPERATIONAL MANAGEMENT OF PORTFOLIO
COMPANIES
TIMING OF OPERATIONAL DUE DILIGENCE IN THE
INVESTING PROCESS
OPERATIONAL DUE DILIGENCE PROCESS
HISTORICAL PERSPECTIVES OF PRIVATE EQUITY
OPERATIONAL RISK
ITEMS TYPICALLY COVERED DURING THE
OPERATIONAL DUE DILIGENCE PROCESS
CORE VERSUS EXPANDED OPERATIONAL DUE
DILIGENCE REVIEWS
SHARED COMMONALITIES BETWEEN PRIVATE
EQUITY AND REAL ESTATE OPERATIONS RISK
DIFFERENCES IN OPERATIONAL RISK FACTORS
BETWEEN PRIVATE EQUITY AND REAL ESTATE
COUNTRY-AND INDUSTRY-SPECIFIC RISK
CONSIDERATIONS
INVESTMENT AND OPERATIONAL DUE DILIGENCE:
NEXUS OR BLURRED LINES?
DIFFERENCES AND SIMILARITIES WITH HEDGE
FUND OPERATIONAL DUE DILIGENCE
CHAPTER 2: Importance of Operational Due Diligence
for Private Equity Funds
UNDERSTANDING THE GOALS OF THE OPERATIONAL
DUE DILIGENCE PROCESS
COMMON ARGUMENTS AGAINST OPERATIONAL
REVIEWS OF PRIVATE EQUITY FUNDS
COMMON ARGUMENTS IN FAVOR OF PERFORMING
OPERATIONAL REVIEWS OF PRIVATE EQUITY FUNDS
CONCLUSION
CHAPTER 3: Beginning the Operational Due Diligence
Review: Core Issues
GOAL SELF-ASSESSMENT
DESIGNING AN OPERATIONAL DUE DILIGENCE
PROGRAM FOR PRIVATE EQUITY
WHEN DOES THE OPERATIONAL DUE DILIGENCE
PROCESS BEGIN?
SIGNALING EFFECTS OF OPERATIONAL FLAGS
REQUESTING AND COLLECTING DOCUMENTATION
NONDISCLOSURE AND CONFIDENTIALITY
AGREEMENTS
DOCUMENT COLLECTION: WHAT DOCUMENTS
SHOULD INVESTORS REQUEST?
DOCUMENT COLLECTION NEGOTIATION
TECHNIQUES: AVOIDING A PASS-THE-BUCK
ENVIRONMENT
DOCUMENT COLLECTION: HARD COPY OR
ELECTRONIC?
FUND MANAGER ON-SITE DUE DILIGENCE
CONSIDERATIONS
KEY RISK CONSIDERATION AREAS TO COVER
CONCLUSION
CHAPTER 4: Additional Operational Due Diligence
Considerations: An Expanded Analysis
CORE ISSUES VERSUS EXPANDED ANALYSIS
COMPENSATION STRUCTURES
INTRODUCTION TO PRIVATE EQUITY FUND FEES
MANAGER INVESTMENT IN FUNDS
EVALUATING SERVICE PROVIDERS
ADDITIONAL ON-SITE VISIT CONSIDERATIONS:
NEGATIVE OPERATIONAL DUE DILIGENCE
ADDITIONAL ON-SITE VISIT CONSIDERATIONS:
INTERVIEW TECHNIQUES AND QUESTION DESIGN
ASSET RAISING AND THE USE OF PLACEMENT
AGENTS AND THIRD-PARTY MARKETERS
CASH MANAGEMENT AND CONTROLS
BUSINESS CONTINUITY AND DISASTER RECOVERY
UNDERSTANDING THE TRADE LIFE CYCLE PROCESS
LEGAL, COMPLIANCE, AND REGULATORY RISKS
INSURANCE
TECHNOLOGY AND SYSTEMS
TAX PRACTICES
DIAGNOSING AND MITIGATING REPUTATIONAL RISK
CONCLUSION
CHAPTER 5: Valuation Techniques, Methodologies,
and Standards
LIMITED PARTNER DISTINCTION BETWEEN FUND
LEVEL AND PORTFOLIO COMPANY VALUATION
APPROACHES
VALUATION CONSIDERATIONS FOR NEWLY FORMED
FUNDS
INTRODUCTION TO VALUATION
GIPS STATEMENT ON PRIVATE EQUITY
IPEV GUIDELINES
FAS 157
USE OF THIRD-PARTY VALUATION CONSULTANTS
VALUATION OUTPUT PROCESS DOCUMENTATION
VALUATION COMMITTEE REVIEW SCOPE
ADDITIONAL LIMITED PARTNER VALUATION
CONSIDERATIONS
CONCLUSION
CHAPTER 6: Legal Due Diligence
OPERATIONAL DUE DILIGENCE SPECIALISTS VERSUS
GENERALISTS
COMMON PRIVATE EQUITY FUND STRUCTURES
UNDERSTANDING THE PRIVATE PLACEMENT
MEMORANDUM
COMMON DOCUMENT RISK ASSIGNMENT TERMS
EXCULPATION AND INDEMNITY
TRENDS IN INDEMNIFICATION AND EXCULPATION
CLAUSES
OTHER LEGAL DOCUMENTS CONSIDERATIONS
CONCLUSION
CHAPTER 7: Financial Statement Due Diligence
AUDIT STANDARDS
ACCOUNTING STANDARDS
OTHER FINANCIAL STATEMENT FORMATS
CONSIDERATIONS THAT ARE UNIQUE TO PRIVATE
EQUITY AND REAL ESTATE FINANCIAL STATEMENTS
UNDERSTANDING FINANCIAL STATEMENT SECTIONS
OTHER FINANCIAL STATEMENT SECTIONS
UNDERSTANDING FAS 157
CONCLUSION
CHAPTER 8: Distinguishing the Assets Class: Real
Estate–Specific Concerns
REAL ESTATE TRADE FLOW PROCESS
SAMPLE REAL ESTATE PROCESS
REAL ESTATE VALUATION
MONITORING CONFLICTS OF INTEREST
FRAUD CONSIDERATIONS: MORTGAGE FRAUD AND
STRAW-MAN BORROWERS
UNDERSTANDING REAL ESTATE FUND FEES
PROPERTY HOLDINGS LEGAL CONSIDERATIONS
CONCLUSION
CHAPTER 9: Putting It All Together: Asset Allocation
and Ongoing Monitoring
INCORPORATING THE RESULTS OF OPERATIONAL
DUE DILIGENCE INTO ASSET ALLOCATION
EVOLUTION OF MINIMUM OPERATIONAL RISK
REGIME (MORR)
OPERATIONAL RISK CORRELATIONS TO PORTFOLIO
TRANSACTION FREQUENCY
OPERATIONAL LIFT-TO-DRAG RATIO
NEGOTIATING PRIVATE EQUITY SIDE LETTERS
ONGOING MONITORING: OPERATIONAL DUE
DILIGENCE MONITORING FOR PRIVATE EQUITY
FUNDS
CONCLUSION
APPENDIX 9A: Mathematical Concepts
THE DERIVATIVE
THE CHAIN RULE
THE SECOND PARTIAL DERIVATIVE TEST
CHAPTER 10: Boards, Committees, and Activism
PRIVATE EQUITY FUND ADVISORY BOARDS
DIFFERENT TYPES OF ADVISORY BOARDS: LIMITED
PARTNERS VERSUS PURE ADVISORS
ONGOING OPERATIONAL DUE DILIGENCE
MONITORING ADVISORY BENEFITS
BALANCING THE ROLE OF INNER CIRCLE VERSUS
BROADLY REPRESENTATIVE ADVISORY BOARDS
ADVISORY BOARD CRITICISMS: CROWDING OUT,
POWER AGGREGATION, AND REDUNDANT BOARD
LAYERS
INFORMATION FLOW CONSIDERATIONS FROM
UNDERLYING PORTFOLIO GENERAL PARTNER TO
LIMITED PARTNERS
LIMITED PARTNER DUE DILIGENCE
CONSIDERATIONS FOR A PRIVATE EQUITY FUND OF
FUNDS
ADDITIONAL PRIVATE EQUITY ADVISORY BOARD
CONSIDERATIONS
CONCLUSION
CHAPTER 11: Case Studies and Scenarios
CASE STUDIES
HYPOTHETICAL SCENARIOS
CHAPTER 12: Trends and Future Developments
USE OF THIRD-PARTY ADMINISTRATORS
INCREASED FOCUS ON MATERIAL NONPUBLIC
INFORMATION IN THE UNITED STATES
INCREASED RELIANCE ON AUDIT-TYPE
CERTIFICATIONS
INCREASED USE OF OPERATIONAL DUE DILIGENCE
CONSULTANTS
POOLING OPERATIONAL DUE DILIGENCE RESOURCES
AMONG MULTIPLE LPS
OPERATIONAL BENCHMARKING
ILPA GUIDELINES
FROM SELF-REGULATION TO MANDATORY
REGISTRATION
IMPACT OF DODD-FRANK ON OPERATIONAL DUE
DILIGENCE
CONCLUSION
About the Author
About the Website
Index
Founded in 1807, John Wiley & Sons is the oldest independent publishing
company in the United States. With offices in North America, Europe, Australia
and Asia, Wiley is globally committed to developing and marketing print and
electronic products and services for our customers’ professional and personal
knowledge and understanding.
The Wiley Finance series contains books written specifically for finance and
investment professionals as well as sophisticated individual investors and their
financial advisors. Book topics range from portfolio management to e-
commerce, risk management, financial engineering, valuation and financial
instrument analysis, as well as much more.
For a list of available titles, visit our Web site at www.WileyFinance.com.