Silence the jargon

When it comes to document requests or anything else during the operational due diligence process, a key phrase from the world of sports comes to mind: KISS—keep it simple, stupid! Real estate, in some instances even more so than private equity, is replete with its own lexicon of legalese and esoteric jargon. There is a tendency among investors to get lost in this land of jargon. As with most industries, the speci?c terminology is steeped in history, has been developed over time, and for practical purposes actually can add real value to discussions among those in the know. 

Jason Scharfman

For example, to the average non–Latin speaking average Joe on the street, explaining that “the onshore vehicle is pari-passu to the offshore” might not mean much. This short sentence conveys a number of different concepts. First, it means that there are two fund vehicles being offered for a particular investment strategy. Second, we know that one of them is domestic in nature. “Domestic” typically means from the same jurisdiction as the fund management company or investor. Third, we can further deduce that based on context, the domestic vehicle is in relation to our average Joe (e.g., the domestic investment vehicle would be the most appropriate for Joe). Fourth, we know that there is another investment vehicle in addition to the domestic vehicle. 

We further know that this vehicle is an offshore vehicle. An offshore vehicle is a fund that is generally more appropriate for investors who reside outside of the previously mentioned domestic jurisdiction. Finally, we know that both the domestic and offshore funds or investment is managed in a pari-passu manner. Pari-passu means in substantially the same manner and most likely under the guidance of the same investment personnel. Everything we have just covered is certainly a mouthful. Therefore, for practical reasons, the technical term pari-passu is preferred to the longer translations of the full term. Investors can think of these terms as being similar to courtroom stenography. The same meaning is conveyed, only in shorthand form. 

The point of our discussion is to illustrate that investors may often be faced with such shorthand during the operational due diligence process. Often a fund manager may not be trying to hide anything by using this industry jargon, rather they are just using these generally accepted, commonly used terms in the private equity industry to communicate in direct terms. When faced with such terms, investors should not be afraid to take immediate action to stop an operational due diligence review cold in its tracks, raise their hands, and ask questions. This cannot be repeated often enough. 

Investors cannot begin to collect operational risk data and then analyse and even monitor such data when they do not even speak the language. In other words, without completely understanding the terminology being used, both in a generic sense as well as in the context of any particular usage being considered, investors are proceeding head?rst into a blinding due diligence snowstorm. The further they proceed without a basic understanding of the terms, the worse it gets. 

Unfortunately, at this stage in the game, investors must take a close look at not only their own internal operational due diligence processes but also at their goals in performing operational due diligence. No one likes to admit that they do not understand something. It is at this point worth taking a moment to distinguish between the terms ignorance and uninformed. 

No one likes to admit that they are ignorant of anything, and certainly not in the context of sophisticated private equity due diligence activities. An investor who does not understand something, albeit an obscure term, an abbreviation, or even an operational due diligence process employed at a ?rm, is not ignorant—they are merely uninformed. An investor who is ignorant is one who does not inquire about an issue that they might not understand. Most investors are not ignorant; they are uninformed. Uninformed investors should not be apologetic about being uninformed. On the contrary, a private equity fund is asking for the opportunity to manage their money and in the context of operational due diligence process there is certainly no such thing as a stupid question. Any fund manager who attempts to make an investor feel foolish for asking a question, however basic it may be, frankly does not deserve the opportunity to manage the investor’s money.