Private Equity Operational Due Diligence Masters

Part I – Hardcore ODD Skills

Preparation

  • Risk profiling
    • Size of the manager (boutique vs institute)
    • Geography (both for the manager and for the investments)
    • Firm & Investment Strategy (including differences between liquid and illiquid investments and fund and corporate exposures)
    • Instruments used
  • Information gathering & (O)DDQ
  • Desktop analysis
  • Determining focus / points of attention for the onsite & set the agenda

Onsite

  • Governance & Firm Ownership
    • Corporate governance framework
    • Governance framework for the Fund/investment
    • Ownership Structure of the management company – proper balance of powers
  • Organizational Overview & Structure
    • Overview of key roles, responsibilities and activities within a firm – focus on the ODD point of view
    • How to ensure decent segregation of duties
    • How to ensure proper countervailing power
  • HR/Staffing
    • Key person risk and mitigants
    • Succession planning
    • Key staff from an ODD point of view
    • When is a manager ‘sufficiently staffed’?
    • Recruitment
    • On-boarding and training
    • Performance appraisal process / retention
    • Background checks on new/existing staff
    • Employee surveys
    • Culture
  • Alignment of Interest
    • Remuneration policies and procedures
    • Bonuses, performance fees / carried interest and co-investments
    • Dependence on one or few large investors in the AuM
    • When is a manager / professional ‘sufficiently aligned’?
    • Non-financial alignment
  • Financial condition of the firm
    • Client base
    • Fee breakeven level
    • Financial analysis (Solvency, NWC, profit margin and operating cash flow)
  • Internal controls
    • Key in-house controls
    • In-house controls versus third-party controls
    • Added value of third party control reports/statements such as SOC1, SSAE16 and ISAE3402
    • Focus areas for ODD in a third party control report/statement and pattern recognition
  • Risk Management (including countervailing power)
    • Risk management organization (independent versus ‘embedded’)
    • Risk management officer role and suitability
    • Operational risk management
    • Financial risk management
  • Compliance (including regulatory, corporate and investment compliance)
    • General
      • Assessing quality of Chief Compliance Officer/General Counsel (qualifications, experience, countervailing power, etc)
      • Suitability of the compliance organization and framework
    • Regulatory compliance
      • Regulatory regime and how to ensure a manager is well-positioned to comply with the relevant rules and regulations
      • Reviewing documentation of regulatory examinations/investigations and what to look for
      • Added value of (regulatory) compliance consultants
    • Corporate compliance
      • Compliance manual and related policies (and focus areas)
      • Code of ethics
      • Compliance training
      • Compliance systems/tooling
    • Investment compliance
      • Main investment compliance topics for alternative investment managers
      • LPA / side letter compliance
  • Background Screening
    • Ways of conducting (independent) background screening
    • Selection of a third party vendor to perform background screening
    • Adverse press and reputational matters
    • Relying on manager information on litigation, legal proceedings, etc.
    • Red/yellow flags and pattern recognition
  • Conflicts of Interest
    • Outside business activities
    • Gifts/entertainment
    • Personal trading
    • Family relationships
    • Allocation of investment opportunities across multiple funds/accounts
    • Capital structure conflicts (debt vs equity investments)
    • Conflicts across investors / limited partners
    • Fee structures
    • Determining proper fee levels and independent verification of fee calculations
  • Investment Life Cycle (focus on the investment process)
    • Investment sourcing
    • Dealing with brokers / intermediaries and in-house ‘consultants’
    • Third party due diligence versus in-house due diligence
    • Investment approval process and documentation
    • Pre-signing checklists and involvement from non-investment staff
    • Use of derivatives
    • Monitoring of investments and information flows from the investments to the manager and ultimately to the investors
    • Hold-sell analysis
    • Divestment process
  • Cash Controls
    • Cash controls on investment/Fund/SPV level: initiation, approval and release of payments
    • In-house cash controls versus third party (administrator) cash controls
    • Cash controls on management company level
  • Fund Accounting
    • Key fund accounting processes
    • Assessing quality of CFO and key fund accounting staff (qualifications, experience, countervailing power, etc)
    • Suitability of key systems used (Investran, eFront, AltaReturn vs QuickBooks and/or Excel)
    • In-house accounting versus third party administrators
  • Custody / Depositary
    • Scope and focus of a custodian / depositary
    • Added value of a custodian / depositary from an investor point of view
  • Valuations
    • Valuation process and policy
    • Valuation techniques
    • Added value of third party appraisals
  • Financial Audit
    • Financial statements review – key focus areas
    • Independence of the auditor
  • Reporting to Investors
    • Reporting process – checks & balances in place
    • Bespoke reporting
    • (not) Meeting reporting deadlines
  • Third Party Service Providers
    • Scope of assignment
    • Focus
    • Agreements – where to look for
    • How to assess suitability/quality of a service provider?
    • Selection and monitoring/oversight
  • IT
    • Key systems
    • IT controls
    • Business continuity / disaster recovery
    • Crisis management
  • Cyber Security
    • Cyber Security governance: role and position of the CISO
    • Cyber Security framework/policy
    • Cyber Security awareness – how to test this?
    • Cyber Security accreditations (such as Cyber Essentials and ISO27001)

Finalizing the ODD Opinion & Reporting

  • How to form/finalize and report an ODD opinion
  • Confirming ODD findings and double-checking (both internally and externally – which may include reference calls)
  • Follow-up and Monitoring (must haves vs nice to haves)

Exam

Part II – Soft (ODD) Skills

  • Onsite conversation techniques (different techniques and how/when to apply)
  • Non-verbal communication (which may include pitch, speed, tone and volume of voice, gestures and facial expressions, body posture, stance, proximity to the listener, eye movements and contact, dress and appearance)
  • How to discuss ‘challenging / sensitive topics’ (including dealing with emotions and/or ‘resistance’)
  • How to “spy the lie”
  • Consistency checking (i.e. discussing the same topic/issue with multiple employees, potentially in a slightly different way)