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CAIA > CAIA - 10 - Private Equity Operational Due Diligence > Flashcards

CAIA - 10 - Private Equity Operational Due Diligence Flashcards

1
Q

Operational risk is assessed during the ___ ___ ___review process

A

Operational risk is assessed during the operational due diligence review process

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2
Q

Due diligence can be divided into two key forms:

  1. ___ due diligence
  2. ___due diligenc
A

Due dilligence can be divided into two key forms:

  1. Operational due diligence
  2. Investment due diligence
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3
Q

There are 5 key benefits to conducting operational due diligence on private equity funds:

  1. Better insight into a fund’s ___-___operational processes
  2. Determining the ___of a fund’s personnel and systems
  3. Determining the firm’s ability to ___to future operational factors
  4. Collecting information on ___ ___ and ___
  5. ___benefits for limited partners
A

There are 5 key benefits to conducting operational due diligence on private equity funds:

  1. Better insight into a fund’s back-office operational processes
  2. Determining the scalability of a fund’s personnel and systems
  3. Determining the firm’s ability to adapt to future operational factors
  4. Collecting information on risk modeling and management
  5. Diagnostic benefits for limited partners
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4
Q

There are 4 main reasons why operational due diligence has expanded recently:

  1. More ___
  2. Continued ___activity
  3. Greater operational ___
  4. Increased ___
A

There are 4 main reasons why operational due diligence has expanded recently:

  1. More resources
  2. Continued fraudulent activity
  3. Greater operational sophistication
  4. Increased regulation
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5
Q

These are the steps for operational due diligence:

  1. Document ___.
  2. Document ___.
  3. ___-___Visit.
  4. Service provider ___and ___.
  5. ___due diligence
  6. Process ___
  7. Operational ___
  8. ___ ___
A

These are the steps for operational due diligence:

  1. Document collection.
  2. Document analysis.
  3. On-site Visit.
  4. Service provider review and confirmation.
  5. Investigative due diligence
  6. Process documentation
  7. Operational decision
  8. Ongoing monitoring
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6
Q

An ___ ___ ___ is a summary of its potential losses and exposures due to errors or failures in the fund’s functions that are unrelated to its investment strategy.

A

An operational risk profile is a summary of its potential losses and exposures due to errors or failures in the fund’s functions that are unrelated to its investment strategy.

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7
Q

There are 2 main issues that arise during the document collection phase:

  1. ___-___document names
  2. Inability to take ___ ___of office
A

There are 2 main issues that arise during the document collection phase:

  1. Non-standard document names
  2. Inability to take documents outside of office
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8
Q

To overcome the issue of non-standard document names, LPs should:

  1. Talk to the manager about the ___
  2. Submit ___requests
A

To overcome the issue of non-standard document names, LPs should:

  1. Talk to the manager about the goals
  2. Submit broad requests
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9
Q

If LPs are not allowed to take documents outside of the fund’s office, they can:

  1. Collect ___ documentation
  2. Review at the ___ ___
A

If LPs are not allowed to take documents outside of the fund’s office, they can:

  1. Collect compromise documentation
  2. Review at the fund’s office
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10
Q

There are two key motivations for the design of PE legal structures:

  1. To facilitate implementation of ___ ___
  2. To ___ ___among the fund’s entities
A

There are two key motivations for the design of PE legal structures:

  1. To facilitate implementation of tax efficiency
  2. To limit liability among the fund’s entities
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11
Q

A PE fund may have an intermediary entity positioned between the GP and LPs, called the ___ or ___ ___.

A

A PE fund may have an intermediary entity positioned between the GP and LPs, called the manager or investment adviser.

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12
Q

The primary legal document for a PE fund is the ___ ___or ___-___ ___.

A

The primary legal document for a PE fund is the offering memorandum or private-placement memorandum.

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13
Q

The offering memorandum serves 4 key functions:

  1. Limited partner ___
  2. Risk ___
  3. Risk ___
  4. Assignment of ___-___ ___
A

The offering memorandum serves 4 key functions:

  1. Limited partner education
  2. Risk disclosure
  3. Risk assignment
  4. Assignment of decision-making authority
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14
Q

There are 2 legal terms that assign risk:

  1. ___
  2. ___
A

There are 2 legal terms that assign risk:

  1. Exculpation
  2. Indemnification
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15
Q

___ refers to releasing a party from blame

A

Exculpation refers to releasing a party from blame

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16
Q

___ refers to compensating for a loss

A

Indemnification refers to compensating for a loss

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17
Q

Investors can request to enter into a ___ ___, which is an ancillary agreement used to negotiate specific terms with a fund.

A

Investors can request to enter into a side letter, which is an ancillary agreement used to negotiate specific terms with a fund.

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18
Q

Some terms of an offering memorandum are:

  1. Fund’s ___
  2. ___
  3. ___commitments and ___commitments
  4. ___considerations
  5. ___of ___
A

Some terms of an offering memorandum are:

  1. Fund’s domicile
  2. Distributions
  3. Capital commitments and unfunded commitments
  4. Tax considerations
  5. Conflicts of interest
19
Q

The ___ fee is the fee paid to the fund regardless of performance

A

The management fee is the fee paid to the fund regardless of performance

20
Q

___ ___is a portion of a fund’s profits paid to the GP

A

Carried interest is a portion of a fund’s profits paid to the GP

21
Q

The following questions should be asked about carried interest:

  1. Does the fund use ___ distributions
  2. Is the carried interest paid based on a ___-by-___or ___-as-a-___approach
  3. ___determines the ___that receive carried interest
  4. What are the ___periods
A

The following questions should be asked about carried interest:

  1. Does the fund use waterfall distributions
  2. Is the carried interest paid based on a deal-by-deal or fund-as-a-whole approach
  3. Who determines the individuals that receive carried interest
  4. What are the vesting periods
22
Q

Collection of fees in ___ is better for LPs

A

Collection of fees in arrears is better for LPs

23
Q

Analysis of valuations from an operational perspective focuses on two key areas:

  1. Internal valuation ___ and ___
  2. ___ ___in the valuation process
A

Analysis of valuations from an operational perspective focuses on two key areas:

  1. Internal valuation policies and procedures
  2. Independent oversight in the valuation process
24
Q

To compensate for vague valuation procedures in offering memorandums, some GPs keep ___ ___detailing valuation procedures

A

To compensate for vague valuation procedures in offering memorandums, some GPs keep separate documents detailing valuation procedures

25
Q

Many PE funds use a ___ ___as a governance mechanism to help internal GP oversight of valuation.

A

Many PE funds use a valuation committee as a governance mechanism to help internal GP oversight of valuation.

26
Q

LPs reviewing the independence of a valuation committee’s review should ask three key questions:

  1. Does the committee membership represent the firm’s ___ ___
  2. What ___does the committee use to ___ or ___valuations
  3. What level of ___ ___does the committee perform
A

LPs reviewing the independence of a valuation committee’s review should ask three key questions:

  1. Does the committee membership represent the firm’s different departments
  2. What process does the committee use to challenge or modify valuations
  3. What level of independent analysis does the committee perform
27
Q

Advisory committees generally (do/do not) have veto or approval power.

A

Advisory committees generally do not have veto or approval power.

28
Q

There are common sections of audited financial statements that LPs should review:

  1. ___ letter
  2. Statement of ___& ___
  3. Statement of ___
  4. Statement of ___ ___
  5. Statement of ___
  6. Schedule of ___
A

There are common sections of audited financial statements that LPs should review:

  1. Opinion letter
  2. Statement of assets & liabilities
  3. Statement of operations
  4. Statement of cash flows
  5. Statement of changes
  6. Schedule of investments
29
Q

The statement of ___ is also known as the ___ ___and provides a summary of the fund’s income and expenses.

A

The statement of operations is also known as the income statement and provides a summary of the fund’s income and expenses.

30
Q

The statement of ___ describes the partner’s capital allocations, contributions, and withdrawals.

A

The statement of changes describes the partner’s capital allocations, contributions, and withdrawals.

31
Q

The ___ of ___describes the portfolio holdings and may classify them in summary form according to certain categories.

A

The schedule of investments describes the portfolio holdings and may classify them in summary form according to certain categories.

32
Q

There are seven key areas covered by financial statement notes:

  1. ___ and ___
  2. Summary of ___ ___ ___
  3. ___
  4. ___and ___
  5. ___-___transactions
  6. ___highlights
  7. ___events
A

There are seven key areas covered by financial statement notes:

  1. Organization and business
  2. Summary of significant accounting principles
  3. Investments
  4. Commitments and contingencies
  5. Related-party transactions
  6. Financial highlights
  7. Subsequent events
33
Q

LPs should ask the following questions about IT-related documents:

  1. How is the IT function ___?
  2. What is the process for distributing ___and ___ ___?
  3. How are ___ ___addressed?
  4. What are the ___ ___for IT issues?
  5. What is the ___ ___ plan?
A

LPs should ask the following questions about IT-related documents:

  1. How is the IT function organized?
  2. What is the process for distributing hardware and software updates?
  3. How are security issues addressed?
  4. What are the escalation procedures for IT issues?
  5. What is the support management plan?
34
Q

Instead of performing an on-site visit, some LPs perform a ___ ___, which involves reviewing the documents collected and possibly calling the GP

A

Instead of performing an on-site visit, some LPs perform a desk review, which involves reviewing the documents collected and possibly calling the GP

35
Q

True or False. Desk reviews are just as good as on-site visits?

A

False

36
Q

There are a number of disadvantages to performing a desk review vs. an on-site:

  1. Less ___
  2. Cannot review documents ___-___
  3. Exposure to ___ ___
A

There are a number of disadvantages to performing a desk review vs. an on-site:

  1. Less comprehensive
  2. Cannot review documents off-site
  3. Exposure to operational risks
37
Q

___ typically develop agendas for on-site visits. This is considered best practice, rather than allowing ___to control the schedule.

A

LPs typically develop agendas for on-site visits. This is considered best practice, rather than allowing GPs to control the schedule.

38
Q

There are 4 key goals when developing an on-site agenda:

  1. ___ the ___collected in the documents
  2. ___in ___in the documents
  3. Get additional information regarding ___ ___
  4. Assess the firm’s ability to demonstrate ___ ___
A

There are 4 key goals when developing an on-site agenda:

  1. Verify the information collected in the documents
  2. Fill in gaps in the documents
  3. Get additional information regarding operations procedures
  4. Assess the firm’s ability to demonstrate operational practices
39
Q

There are two primary goals for on-site visit agendas:

  1. ___ ___to be covered
  2. Meet ___ __ ____
A

There are two primary goals for on-site visit agendas:

  1. Specify topics to be covered
  2. Meet key operational personnel
40
Q

___ risks are risks beyond measurable capital market risks.

A

Meta risks are risks beyond measurable capital market risks.

41
Q

LPs have three primary goals when interacting with service providers.

  1. ___ the GPs ___with the service provider
  2. Assess the ___of the service provider
  3. Assess the ___of ___
A

LPs have three primary goals when interacting with service providers.

  1. Confirm the GPs relationship with the service provider
  2. Assess the appropriateness of the service provider
  3. Assess the quality of services
42
Q

There are several common service providers used by PE firms:

  1. ___
  2. ___consultants
  3. ___ ___
  4. ___consultants
  5. ___
A

There are several common service providers used by PE firms:

  1. Banks
  2. IT consultants
  3. Legal counsel
  4. Compliance consultants
  5. Auditors
43
Q

There are 3 common areas addressed during ongoing monitoring of a firm:

  1. Reviewing the status of ___ ___ ___
  2. Analyzing new ___ ___
  3. Evaluating the current position regarding continued operational ___ and ___
A

There are 3 common areas addressed during ongoing monitoring of a firm:

  1. Reviewing the status of planned operational improvements
  2. Analyzing new operational developments
  3. Evaluating the current position regarding continued operational scalability and controls

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