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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 11

Case Studies and Scenarios

When reviewing a private equity firm's operational data, there are often a number of grey areas that come to the surface as part of the review process. Depending on where a particular investor's operational threshold lies, plus numerous other factors, rational investors can come to different allocation decisions. The purpose of this chapter is to provide some perspective to Limited Partners when they are approaching these operational crossroads by outlining several case studies and scenarios an investor may be presented with when conducting an operational due diligence review. This chapter begins by outlining the details of historical private equity frauds. We then proceed with a discussion of several hypothetical situations. All situations and persons described in these scenarios are purely fictional and solely for demonstrative purposes.

CASE STUDIES

Many Limited Partners (LPs), General Partners (GPs), and others involved in the private equity industry, such as service providers, may in general have a perceived notion that their industry is virtually immune from large-scale losses as a result of fraud. Fueling such concerns could be the lack of Madoff-type events in recent memory, which produce sensationalist headlines and widespread global losses. A review of recent history in this regard, however, presents a stark comparison to notions that private equity functions in a moral vacuum in which fraud cannot survive. Fraud and losses due to ...

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