Summary of Jason A. Scharfman's Private Equity Operational Due Diligence

By IRB Media

Please note: This is a companion version & not the original book.

Book Preview: #1 Private equity investing is a unique asset class that can offer a number of attractive benefits to investors. Compared to more traditional investments, some of the benefits associated with private equity investing can include the ability to focus on long-term capital growth with higher uncorrelated returns.

#2 There are many names for the noninvestment-related risks that can affect a business. Some may refer to these noninvestment-related risks as fat-tail risks. The term fat-tail risks is used due to the severe effects that these risk may have, coupled with the perceived infrequency with which they actually cause damage.

#3 There are many factors that can fall into the category of operational risks. Common operational risks are outlined in Exhibit 1. 1.

#4 The term operational risk is used to describe the risks that come from the day-to-day operations of a business. It is usually a term whose definition is driven by the market.

• Language: English
• Publisher: IRB Media
• Release date: Feb 16, 2022
• ISBN: 9781669348306

IRB Media

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Insights on Jason A. Scharfman's Private Equity Operational Due Diligence

Contents

Insights from Chapter 1

Insights from Chapter 2

Insights from Chapter 3

Insights from Chapter 4

Insights from Chapter 5

Insights from Chapter 6

Insights from Chapter 7

Insights from Chapter 8

Insights from Chapter 9

Insights from Chapter 10

Insights from Chapter 11

Insights from Chapter 12

Insights from Chapter 13

Insights from Chapter 1

#1

Private equity investing is a unique asset class that can offer a number of attractive benefits to investors. Compared to more traditional investments, some of the benefits associated with private equity investing can include the ability to focus on long-term capital growth with higher uncorrelated returns.

#2

There are many names for the noninvestment-related risks that can affect a business. Some may refer to these noninvestment-related risks as fat-tail risks. The term fat-tail risks is used due to the severe effects that these risk may have, coupled with the perceived infrequency with which they actually cause damage.

#3

There are many factors that can fall into the category of operational risks. Common operational risks are outlined in Exhibit 1. 1.

#4

The term operational risk is used to describe the risks that come from the day-to-day operations of a business. It is usually a term whose definition is driven by the market.

#5

Operational due diligence is the process of performing due diligence on these operational risks. It is the process of gathering data about a private equity fund, and then analyzing that data to determine the amount of operational risk present.

#6

Operational due diligence is the process of checking the health of a business after it has been acquired. It is a multifaceted and deep field of due diligence that lacks a universal definition. Among most individuals in the private equity community, operational due diligence tends to be an amorphous concept.

#7

When first beginning to think about the subject of items that may influence the ultimate investment decision other than just investment-related concerns, private equity investors may focus on concerns related to fraud in the management of a private equity fund. This is understandable, as fraud is a fat-tailed risk.

#8

The operational due diligence process should not be focused on fraud detection and prevention, but rather on the other goals of the process. Regardless of the potential recovery options when a fraud occurs, both situations have the same initial destructive effects.

#9

There is no single definition of operational due diligence, and it is a developing field with its own unique moniker. Some consider it to be a catch-all hodgepodge of different disciplines and subjects, while others consider it to be the process of making sure that the fund manager is properly valuing securities and not stealing from the firm.

#10

The process of operational due diligence is made up of a series of basic processes, techniques, and risk factors that can be found in any area of due diligence. It is these areas that are the core of operational due diligence, and should be the bedrock upon which a larger due diligence process is built.

#11

Private equity funds, like other alternative investment funds, have lottery-like characteristics. They are an asset class that has been referred to as having lottery-like characteristics. Therefore, one of the key considerations in assessing the potential benefits and risks that will be factored into an investor's decision making process to invest in private equity will be the competence, skill, and quality of the operational infrastructure of the private equity fund manager.

#12

The terms and concepts associated with operational risk and operational due diligence in private equity must be understood, as they are often used interchangeably. In this book, operational due diligence refers to the due diligence on operational risks that private equity funds undergo before they are funded.

#13

The typical private equity decision-making process involves a series of investment and operational filtering stages. An investor may begin the operational due diligence process in parallel with the investment process. In certain cases, similar operational requirements may be in place. To avoid unnecessary expenditure of time and resources, an investor may attempt to perform an initial operational screening to evaluate whether the private equity fund or manager should be discarded out of hand.

#14

The typical due diligence process involves a series of stages, each of which is intended to filter out unsuitable investments. These initial investment and operational screens must be passed before proceeding through the remaining due diligence process.

#15

The operational due diligence process involves an investor developing a dialogue with a private equity firm, focusing on the investment strategy of the firm, and checking the investments the fund is making or planning to make.

#16

The five stages of analysis in investor private equity due diligence are: fund, firm, portfolio companies, regulatory compliance, and due diligence. The stages are not necessarily sequential, and many investors prefer to advance through them out of order,