Originally posted in the August 2012 edition of Corgentum Consulting's Operational Due Diligence Insights.

1. PE LP's Are Utilizing Operational Due Diligence to
Make Their Voices Heard
Increasingly, private equity investors, commonly referred to as Limited Partners or LP's, are performing
operational due diligence prior to allocating to private equity funds. It is good to see that LP's have taken
cues from their hedge fund counterparts, and are increasingly recognizing that private equity funds
present just as many, if not more, operational risks to investors as compared to hedge funds.
Unfortunately, private equity fund managers, commonly referred to as General Partners or GP's, have
been slower than their hedge fund portfolio manager counterparts in listening to LP feedback. This is to
be expected as GP's have long capitalized on the long-term nature of private equity investing to insulate
themselves from frequent interaction with LPs.
In the past, after an LP committed capital, there were little if any updates from GPs outside of
prescheduled updates, generally quarterly, on portfolio performance. Such an arrangement has
effectively robbed LPs of their voice as partners in the investing process. More LPs have come to
acknowledge this fact, and are increasingly pro-actively sharing feedback with GPs after the initial and
ongoing operational due diligence processes.
So consider for example, an LP who is considering making an investment in a private equity fund. This LP
has wisely decided to perform operational due diligence on the GP. After the review, the LP has a list of
several operational deficiencies and areas in which the LP feels compared to their peers the GP could
improve.
Continuing our example, let us assume that from the LPs perspective none of these items are so serious
as to preclude him from investing, but rather he would feel more comfortable if the GP took corrective
action on these matters. At a minimum, the LP feels it is important to make the GP aware of these
issues.
While previously a GP may have politely listened to such feedback and taken little corrective action,
more LPs are increasingly monitoring how well GPs respond to this feedback. This includes performing
ongoing operational due diligence to both monitor process improvements, as well as to detect any new
operational risks.
Clinging to their old ways, however, many GPs aren't frankly interested in this ongoing LP operational
due diligence process or receiving any such feedback from LPs that have already committed capital. To
facilitate this lack of dialogue, GPs utilize a structure whereby they have so-called advisory boards upon
which typically sit the largest investors in a particular fund. As such, smaller LPs effectively become
squeezed out of the process. More LPs are beginning to realize the flaws in such arrangements and have
decided to become proactive not only in their due diligence efforts, but in engaging with GPs in more
frequent dialogues concerning both investment and operational issues.

2. A program of initial and ongoing operational due diligence for private equity can help ensure that an LP
detects operational issues before committing capital, and is alerted to any new potential problems
before they spin out of control. As this trend continues, LPs that do not engage in such programs may
increasingly find themselves to be the exception rather than the norm.
Originally posted in the August 2012 edition of Corgentum Consulting's Operational Due Diligence
Insights.
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About Corgentum Consulting:
Corgentum Consulting is a specialist consulting firm which performs operational due diligence
reviews of fund managers.
The firm works with investors including fund of funds, pensions, endowments, banks ultra-high net-
worth individuals, and family offices to conduct the industry's most comprehensive operational due
diligence reviews. Corgentum's work covers all fund strategies globally including hedge funds, private
equity, real estate funds, and traditional funds. The firm's sole focus on operational due diligence,
veteran experience, innovative original research and fundamental bottom up approach to due
diligence allows Corgentum to ensure that the firm's clients avoid unnecessary operational risks.
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