Originally posted in the February 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

1. Private Equity Investor Approaches
Once an investor begins developing an operational due diligence program, there is a likely tendency
over time for the nature of fund manager reviews to change over time. This could be in part due to
changes in the market environment in which fund managers operate. An example of this would be
regulatory changes such as changes in SEC registration requirements. Such changes would affect
the nature of a fund manager's operational risk environment and therefore, investors would need to
tailor their operational due diligence programs accordingly. The nature of operational due diligence
reviews can also change among different fund managers within the same asset class. For example,
an investor might be required to perform a different type of operational due diligence review on the
valuation practices of a long/short equity fund manager as compared to a distressed manager.
Similarly, operational due diligence techniques may also vary among asset classes. This is
particularly true in comparing operational due diligence approaches to hedge fund and private equity
funds.
When investors begin the operational due diligence process, they may develop a core process
around a certain asset class. In recent years, many investors developed their operational due
diligence programs around hedge funds. The logic behind this may have been that many investors
may have viewed hedge funds to be the riskiest parts of their overall investments, at least from an
operational risk perspective. Over time, more and more investors have begun to realize the benefits
of a well-developed operational due diligence program which reviews operational risk across fund
managers from all asset types including hedge funds, private equity and long only managers.
Focusing on private equity in particular, there are a number of different operational due diligence
approach commonalities and differences between hedge funds and private equity. Some common
similarities between hedge fund and private equity operational due diligence include the shared
process goals of evaluating operational risk. Additionally, among hedge funds and private equity
operational due diligence approaches for most investors, there will also likely be an overlap in core
operational risk areas reviewed such as valuation, technology, regulatory and compliance
It is also worth considering the ways in which the underlying fund managers themselves are different
from an operations perspective. As compared to their hedge fund counterparts traditionally, private
equity managers trade less frequently than hedge funds. Investors may dangerously equate less
trading frequency with less operational risk.
While increased trading frequency may increase the time span over which a trading problem may
occur, this does not necessarily decrease the magnitude of potential losses. Operational problems in
private equity firms may result in trading losses which are more consolidated and may still lead to
equal or greater losses, as compared to more frequently traded hedge funds. As such investors
which initially developed an operational due diligence program centered around hedge fund
investments, one must not ignore operational risks relating to trade operations when applying this
core program to private equity.Other key traditional differences between hedge fund and private
equity funds that investors might want to consider in tailoring their operational due diligence
programs include:
 Private equity portfolios may be more concentrated as compared to hedge funds
 After initial fund raising, many private equity funds generally do not have as actively traded
portfolios as hedge funds
 Beyond certain core documents, hedge funds and private equity funds will generally have
different series of documents which an investor will need to collect and review during the
operational due diligence process

2.  Investors may need more asset specific knowledge to effectively perform operational due
diligence on certain private equity funds
Due to these differences, investors should consider the benefits of not employing one single
approach towards operational due diligence which lumps together all asset classes and fund
managers. Instead, investors should take measures to adapt their hedge fund operational due
diligence programs appropriate so as to ensure the key operational risks associated with private
equity funds are appropriately vetted. The results will be better tailored operational risk reviews
which afford investors with the opportunity to drill down on operational risks specific to each asset
class.
Originally posted in the February 2012 edition of Corgentum Consulting's Operational Due
Diligence Insights.
For More info@corgentum.com
Information Corgentum.com | Blog | Twitter Feed
Tel. 201-360-2430
About Corgentum Consulting:
Corgentum Consulting is a specialist consulting firm which performs operational due diligence
reviews of fund managers. The firm works with investors including fund of funds, pensions,
endowments, banks ultra-high net-worth individuals, and family offices to conduct the industry's
most comprehensive operational due diligence reviews. Corgentum's work covers all fund strategies
globally including hedge funds, private equity, real estate funds, and traditional funds. The firm's sole
focus on operational due diligence, veteran experience, innovative original research and
fundamental bottom up approach to due diligence allows Corgentum to ensure that the firm's clients
avoid unnecessary operational risks. Corgentum is headquartered at 26 Journal Square, Suite 1005
in Jersey City, New Jersey, 07306. Phone 201-360-2430. For more information visit,
www.Corgentum.com or follow us on Twitter @Corgentum.