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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 8

Distinguishing the Assets Class: Real Estate–Specific Concerns

Some private equity investors may consider real estate to be a distinct asset class that has very little if any relation to private equity funds. Indeed, if investors approach the subject with any private equity fund manager themselves, they are likely to hear a long litany of reasons regarding why the two asset classes are different. Others may draw more similarities between the two types of investments. From the investor's perspective it is easy to see from where such similarities arise. Both investments in real estate and private equity require a longer-term investment horizon as compared to perhaps more liquid asset classes such as hedge funds. Additionally, both private equity and real estate funds tend to invest in more illiquid positions, as compared to hedge funds.

From the perspective of an investor seeking to perform operational due diligence on both private equity and real estate funds, accompanying these shared illiquidity characteristics are similarities in approaches to valuing illiquid assets as well as fund structures.

Despite such similarities it is important for investors not to approach operational due diligence reviews of both private equity and real estate funds with a blanket approach. Such a universal approach may result in a homogenized approach that diminishes some of the particularities regarding each asset class. This chapter provides an introduction to certain issue-specific factors ...

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