Private Equity Operational Due Diligence -- Contents -- 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 -- Notes -- 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 -- Notes -- 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 -- Notes -- 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 -- Notes -- 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 -- Notes -- 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 -- Notes -- 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 -- Notes -- 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 -- Note -- 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: Mathematical Conepts -- The Derivative -- The Chain Rule -- The Second Partial Derivative Test -- Notes -- 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 -- Notes -- CHAPTER 11 Case Studies and Scenarios -- Case Studies -- Hypothetical Scenarios -- Notes -- 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 -- Notes -- About the Author -- About the Website -- Index.