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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 9

Putting It All Together: Asset Allocation and Ongoing Monitoring

After an investor has completed an operational due diligence review of a particular private equity fund, they must then come to an operational conclusion. At first glance, this conclusion is binary in nature: a particular private equity fund may either pass or fail a particular investor's operational requirements. This decision necessarily influences the investment decision. For example, if a fund does not pass operational muster, even if a fund is acceptable to an investor from an investment due diligence perspective, the investor will likely not invest in the fund. We are assuming that if an investor bothers to exert the time, resources, and energy required to perform operational due diligence, then he or she will not simply discard the conclusions of this process and proceed blindly with an allocation based solely on investment considerations. Similarly, if a private equity fund's operational infrastructure is strong enough to pass a particular investor's internal operational risk threshold yet does not pass investment muster, we will assume that this investor would not proceed with an investment solely on the operational strengths of a fund.

Yet what about the situation in which an investor has performed both investment and operational due diligence and the fund passes the binary, allocate or not allocate, test on both regards? Another question an investor may consider is how much capital to allocate ...

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