CAIA - 10 - Private Equity Operational Due Diligence Flashcards Preview

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Flashcards in CAIA - 10 - Private Equity Operational Due Diligence Deck (43)
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1

Operational risk is assessed during the ___ ___ ___review process

Operational risk is assessed during the operational due diligence review process

2

Due diligence can be divided into two key forms:

 

1. ___ due diligence

2. ___due diligenc

Due dilligence can be divided into two key forms:

 

1. Operational due diligence

2. Investment due diligence

3

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

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

4

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

 

1. More ___

2. Continued ___activity

3. Greater operational ___

4. Increased ___

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

5

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. ___ ___

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

6

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.

7

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

 

1. ___-___document names

2. Inability to take ___ ___of office

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

8

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

 

1. Talk to the manager about the ___

2. Submit ___requests

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

 

1. Talk to the manager about the goals

2. Submit broad requests

9

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

 

1. Collect ___ documentation

2. Review at the ___ ___

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

10

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

 

1. To facilitate implementation of ___ ___

2. To ___ ___among the fund's entities

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

11

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.

12

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.

13

The offering memorandum serves 4 key functions:

 

1. Limited partner ___

2. Risk ___

3. Risk ___

4. Assignment of ___-___ ___

The offering memorandum serves 4 key functions:

 

1. Limited partner education

2. Risk disclosure

3. Risk assignment

4. Assignment of decision-making authority

14

There are 2 legal terms that assign risk:

 

1. ___

2. ___

There are 2 legal terms that assign risk:

 

1. Exculpation

2. Indemnification

15

___ refers to releasing a party from blame

Exculpation refers to releasing a party from blame

16

___ refers to compensating for a loss

Indemnification refers to compensating for a loss

17

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.

18

Some terms of an offering memorandum are:

 

1. Fund's ___

2. ___

3. ___commitments and ___commitments

4. ___considerations

5. ___of ___

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

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

20

___ ___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

21

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

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

Collection of fees in ___ is better for LPs

Collection of fees in arrears is better for LPs

23

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

 

1. Internal valuation ___ and ___

2. ___ ___in the valuation process

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

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

25

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

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

26

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

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

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

Advisory committees generally do not have veto or approval power.

28

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 ___

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

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

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

30

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

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

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