LPs' back office inspection set to rise

Investors intend to spend more time assessing private equity funds’ back office support, ability to meet compliance and other areas of operational risk, according to a 150 LP survey from consultancy house Corgentum Consulting.
 
Already investors are subjecting hedge funds to this kind of review, but only 26 percent of LPs that do so perform similar operational due diligence on their chosen private equity firms. When asked why the majority of respondents said they simply had not done so in the past. Other reasons cited include being unsure of the benefits or not knowing how to perform such a review in the private equity space.

“Institutional investors exhibit a post-Madoff type mentality where tougher questions are being asked around fund operations; the kicker being better relations for those GPs able to pass their expectations,” said Jason Scharfman, a managing partner at Corgentum.

Institutional investors exhibit a post-Madoff type mentality where tougher questions are being asked around fund operations

The study revealed that of the 74 percent of respondents who said they perform operational due diligence on hedge funds but not private equity funds, 68 percent of that subset said they plan to do so in the coming year. Driving the trend is the need to perform some basic level of operational due diligence across the portfolio, increased pressure to do so from those whose money is being managed and increasing concerns about private equity risks in general.
 
Regarding specific risks, most investors (34 percent) said valuation was the largest operational risk in private equity. That was followed by 22 percent of respondents citing a firms’ standards on compliance and corporate governance, while 17 percent said traditional back office procedures was their biggest source of concern.