Preface
People tend to not take operational due diligence in the field of private equity very seriously. The risk category that operational due diligence is supposed to evaluate—operational risk—is not as narrowly defined as other related types of risks, such as credit risk, counterparty risk, currency risk, and so forth. Depending on the context, the implications of the term operational risk can change. In part, the broadness of the field and subsequent confusion about exactly what is meant when discussing operational risk and operational due diligence are likely contributing factors to the lack of attention paid to this risk category.
When an investor first decides to take the plunge into private equity investing, it is often an anticlimactic choice. In some cases, hundreds of millions of dollars are committed by institutional Limited Partners (LPs) to private equity funds, but the money may not generate returns for years. Yet, with such a long-term commitment of capital into a traditionally illiquid and complex asset class, it would seem only logical that LPs would seek to perform at least as rigorous a due diligence analysis on a private equity fund as they perform on other asset classes, such as hedge funds. In investing arenas outside of private equity, operational due diligence has slowly gained acceptance over the years. Within the alternative investment arena in general and hedge funds in particular, a key driver of increased focus is the losses that have been caused ...
