LPs quiz CFOs during manager due diligence

Operations teams are coming under increased scrutiny from investors.


Investors are doing more due diligence on back-office teams as a result of the regulatory crackdown on private fund firms, according to market sources. 

Speaking at sister publication Private Equity International's Investor Relations Forum in New York last week, a panel of investors and fund managers said operational due diligence has become almost as important as investment checks when an LP is considering a manager.

“We had a number of investors sending in separate teams to speak with our CFO, CCO and general counsel during our last fundraise, more than ever before,” the head of investor relations at a global private equity firm said. 

Operational due diligence teams wanted to be sure the general partner had everything in place for a Securities and Exchange Commission examination and to understand what steps the firm was taking to ensure regulatory compliance, the IR head added. 

“No firm is going to get a clean bill of health from the SEC, but investors want to be sure that the firm has the right policies and procedures in place, and that if the SEC does come in to examine them, there won't be any big surprises,” he said. 

The panelists said investors asked to meet the accountants and examined their valuation methodology. 

As an investor, operational due diligence can put your mind at ease on regulatory issues, and helps you to build a better relationship with your GP partners, one LP said. 

“We've been doing operational due diligence for a while. It means we know exactly who we need to ask if we have specific back-office questions, and it makes us feel like we are getting fantastic client service,” he added.