CAIA - 10 - Private Equity Operational Due Diligence Flashcards
Operational risk is assessed during the ___ ___ ___review process
Operational risk is assessed during the operational due diligence review process
Due diligence can be divided into two key forms:
- ___ due diligence
- ___due diligenc
Due dilligence can be divided into two key forms:
- Operational due diligence
- Investment due diligence
There are 5 key benefits to conducting operational due diligence on private equity funds:
- Better insight into a fund’s ___-___operational processes
- Determining the ___of a fund’s personnel and systems
- Determining the firm’s ability to ___to future operational factors
- Collecting information on ___ ___ and ___
- ___benefits for limited partners
There are 5 key benefits to conducting operational due diligence on private equity funds:
- Better insight into a fund’s back-office operational processes
- Determining the scalability of a fund’s personnel and systems
- Determining the firm’s ability to adapt to future operational factors
- Collecting information on risk modeling and management
- Diagnostic benefits for limited partners
There are 4 main reasons why operational due diligence has expanded recently:
- More ___
- Continued ___activity
- Greater operational ___
- Increased ___
There are 4 main reasons why operational due diligence has expanded recently:
- More resources
- Continued fraudulent activity
- Greater operational sophistication
- Increased regulation
These are the steps for operational due diligence:
- Document ___.
- Document ___.
- ___-___Visit.
- Service provider ___and ___.
- ___due diligence
- Process ___
- Operational ___
- ___ ___
These are the steps for operational due diligence:
- Document collection.
- Document analysis.
- On-site Visit.
- Service provider review and confirmation.
- Investigative due diligence
- Process documentation
- Operational decision
- Ongoing monitoring
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.
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.
There are 2 main issues that arise during the document collection phase:
- ___-___document names
- Inability to take ___ ___of office
There are 2 main issues that arise during the document collection phase:
- Non-standard document names
- Inability to take documents outside of office
To overcome the issue of non-standard document names, LPs should:
- Talk to the manager about the ___
- Submit ___requests
To overcome the issue of non-standard document names, LPs should:
- Talk to the manager about the goals
- Submit broad requests
If LPs are not allowed to take documents outside of the fund’s office, they can:
- Collect ___ documentation
- Review at the ___ ___
If LPs are not allowed to take documents outside of the fund’s office, they can:
- Collect compromise documentation
- Review at the fund’s office
There are two key motivations for the design of PE legal structures:
- To facilitate implementation of ___ ___
- To ___ ___among the fund’s entities
There are two key motivations for the design of PE legal structures:
- To facilitate implementation of tax efficiency
- To limit liability among the fund’s entities
A PE fund may have an intermediary entity positioned between the GP and LPs, called the ___ or ___ ___.
A PE fund may have an intermediary entity positioned between the GP and LPs, called the manager or investment adviser.
The primary legal document for a PE fund is the ___ ___or ___-___ ___.
The primary legal document for a PE fund is the offering memorandum or private-placement memorandum.
The offering memorandum serves 4 key functions:
- Limited partner ___
- Risk ___
- Risk ___
- Assignment of ___-___ ___
The offering memorandum serves 4 key functions:
- Limited partner education
- Risk disclosure
- Risk assignment
- Assignment of decision-making authority
There are 2 legal terms that assign risk:
- ___
- ___
There are 2 legal terms that assign risk:
- Exculpation
- Indemnification
___ refers to releasing a party from blame
Exculpation refers to releasing a party from blame
___ refers to compensating for a loss
Indemnification refers to compensating for a loss
Investors can request to enter into a ___ ___, which is an ancillary agreement used to negotiate specific terms with a fund.
Investors can request to enter into a side letter, which is an ancillary agreement used to negotiate specific terms with a fund.
Some terms of an offering memorandum are:
- Fund’s ___
- ___
- ___commitments and ___commitments
- ___considerations
- ___of ___
Some terms of an offering memorandum are:
- Fund’s domicile
- Distributions
- Capital commitments and unfunded commitments
- Tax considerations
- Conflicts of interest
The ___ fee is the fee paid to the fund regardless of performance
The management fee is the fee paid to the fund regardless of performance
___ ___is a portion of a fund’s profits paid to the GP
Carried interest is a portion of a fund’s profits paid to the GP
The following questions should be asked about carried interest:
- Does the fund use ___ distributions
- Is the carried interest paid based on a ___-by-___or ___-as-a-___approach
- ___determines the ___that receive carried interest
- What are the ___periods
The following questions should be asked about carried interest:
- Does the fund use waterfall distributions
- Is the carried interest paid based on a deal-by-deal or fund-as-a-whole approach
- Who determines the individuals that receive carried interest
- What are the vesting periods
Collection of fees in ___ is better for LPs
Collection of fees in arrears is better for LPs
Analysis of valuations from an operational perspective focuses on two key areas:
- Internal valuation ___ and ___
- ___ ___in the valuation process
Analysis of valuations from an operational perspective focuses on two key areas:
- Internal valuation policies and procedures
- Independent oversight in the valuation process
To compensate for vague valuation procedures in offering memorandums, some GPs keep ___ ___detailing valuation procedures
To compensate for vague valuation procedures in offering memorandums, some GPs keep separate documents detailing valuation procedures
