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Private Equity Operational Due Diligence: Tools to Evaluate Liquidity, Valuation, and Documentation by Jason A. Scharfman

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CHAPTER 2

Importance of Operational Due Diligence for Private Equity Funds

In most disciplines related to the concept of investing, there is little argument as to both the scope of the fields covered by the particular discipline and whether any particular field can be justified in the first place. Analyzed in a straightforward manner, the discipline of investment due diligence in private equity would generally be agreed to be broadly related to selecting, analyzing, and funding private equity funds. Furthermore, in order to invest in private equity it would certainly seem justified that there be a discipline dedicated to this exercise. Another less obvious example would be the discipline of risk management. Even outside the world of private equity, risk management is a well-established field in asset management that covers areas relating to diagnosing and mitigating risk or even facilitating calculated risk taking. Furthermore, it is likely that almost everyone both within and outside of the private equity community would plainly acknowledge that risk management is essential. Operational due diligence, however, is not as well understood and appears to be odd man out.

Many investors seem unsure about whether or not they should be performing operational due diligence reviews on private equity funds. Even operational due diligence analysts who primarily focus on other asset classes such as hedge funds often seemed confused, if not downright resistant, about performing operational ...

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