Practical Applications of Analysis of Three Emerging Trends in Limited Partner Operational Due Diligence

Practical Applications Summary

In Analysis of Three Emerging Trends in Limited Partnership Operational Due Diligence, from the Winter 2020 issue of The Journal of Alternative Investments, author Jason Scharfman (of Corgentum Consulting) details three ways in which institutional investors (known as limited partners, or LPs) have increased the operational due diligence (ODD) they do on alternative investment fund managers (known as general partners, or GPs). ODD is the process by which LPs analyze the potential for investment losses due to inadequate processes, failed systems, or fraudulent behavior among GPs. Prompted by high-profile instances of fraud committed by fund managers (like Bernie Madoff) and increased regulatory requirements, LPs have improved their ODD by expanding its scope (the number of risk factors evaluated), depth (the amount of detail requested), and integration with investigative due diligence (such as criminal background checks on fund managers).

To help coordinate and ensure the quality of this expanded ODD, some LPs have stopped outsourcing investigative due diligence to third parties and brought it in-house to help integrate it with ODD. Eliminating the middleman in this way helps focus the investigation on what is most relevant to the LP while containing costs as well.

TOPICS: Real assets/alternative investments/private equity, legal/regulatory/public policy