Due Diligence Before Investing (Series: PE, VC and Hedge Funds De-Mystified)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Michele Itri – Tannenbaum, Helpern, Syracuse & Hirschtritt
Panelists:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger LLP
Keith Bank – KB Partners
David Lorry – Versa Capital Management LLC
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ABOUT THIS WEBINAR:
Due Diligence Before Investing
Private funds face strong challenges even before deploying their capital, but knowing when
and where to source new investments requires an entirely different set of problem-solving
skills. Professionals at private funds have to scrutinize target assets with quantitative and
qualitative research and other due diligence. In this webinar, we discuss the performing
due diligence from the perspective of private equity, venture capital and hedge fund
professionals. This webinar also touches on the due diligence a potential investor in a
private fund should do on the fund.
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ABOUT THIS SERIES:
PE, VC, and Hedge Funds De-Mystified
Many people are familiar with the terms private equity, venture capital and hedge fund,
but few can actually define how each investment vehicle operates or makes money. Thanks
to their seemingly complicated nature and lucrative reputations, the PE, VC and hedge
fund industries occupy an almost mythic (and sometimes infamous) status for Americans.
The combination of mystery and wealth creates a vacuum for misinformation and mistrust.
This webinar series de-mystifies these private funds, explaining their similarities and
differences from other investment vehicles and from each other- from the legal, financial,
and investment mandate perspectives.
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EPISODES IN THIS SERIES
2/5/19 Episode #1:
What is a “Private Fund?”
3/5/19 Episode #2:
Basics of Fund Formation
4/9/19 Episode #3:
Capital Raising
5/7/19 Episode #4:
Due Diligence Before Investing
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #4:
PE, VC, and Hedge Funds De-Mystified
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SOURCING AN INVESTMENT
OPPORTUNITY
• Deals are sourced through a variety of channels, depending on the firm:
✓ Internal analysis
✓ Networking
✓ Detailed research
✓ Cold-calling executives at attractive companies
✓ Financial intermediaries
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DUE DILIGENCE OF WHAT AND BY
WHOM?
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Of GP by
prospective LPs
Of potential
portfolio
investments by
Fund

LP DUE DILIGENCE OF GP
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PATERNALISTIC LAWS
• Income and other requirements generally limit private fund investments
to presumably sophisticated investors
✓ BUT…
• Laws have been relaxed in recent years
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RESEARCHING A FUND MANAGER
• General, a fund manager must be registered with the SEC or a state securities
commission as an investment adviser
✓ Larger advisers register with the SEC; smaller advisers generally register with
the state securities commission in the state they are located
• One can search for the manager on the SEC’s investment Adviser Public
Disclosure website
• Advisers registered with the SEC must complete a Form ADV, providing
information about the business, ownership, clients, etc.
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(cont’d)
➢ Important Data Points:
• Mandate of fund
• Manager’s bench
✓ Track record with other funds
✓ Other experience
• Identity of service providers
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(cont’d)
• Valuation process/controls (mark-to-market; fair valuation; any third party review,
approval)
• Review of audited financial statements since inception
• Review qualifications and unusual footnote
• Evaluate quality/reputation of auditor
• Evaluate quality/reputation of prime broker
• Any changes to service providers?
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(cont’d)
• Identity of service providers
• Organizational structure
• Separation of responsibilities?
• Independent checks?
• Strong compliance function?
• Third party marketing arrangements
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RESEARCHING A FUND MANAGER (cont’d)
• How frequently does Manager test and verify the effectiveness of controls?
• What are Manager’s reporting and communication procedures?
• How quickly do issues get resolved?
• Review of portfolio management systems
• Robustness/location of redundancy systems
✓ Data storage
✓ Firewalls
✓ Disaster recovery
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GENERAL CHALLENGES WITH
UNLISTED INVESTMENTS
• Governance
• Valuations and transfer pricing
• Liquidity
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RED FLAGS
• Manager is applying pressure to make an investment immediately.
• Manager guarantees a high return.
• Manager encourages you to lie about your assets/income to meet the
“accredited investor” test.
• You cannot find information about manger on SEC website or through any
state securities commission.
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CONFLICT OF INTEREST CONSIDERATIONS
• Is the compliance function robust and independent?
• Any related party transactions or use of affiliated broker or other service
provider?
• How are prime brokers and other service providers selected?
• Side letters? How does the manager disclose the existence of side letters and
types of terms that may vary?
• Personal trading policies and procedures? Side-by-side trading/allocation
procedures?
• Error correction procedures?
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FUND DUE DILIGENCE OF
INVESTMENT OPPORTUNITIES
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SOURCING A PE INVESTMENT OPPORTUNITY
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FUND DUE DILIGENCE OF INVESTMENT
OPPORTUNITIES (cont’d)
• Due diligence is (hopefully) a rigorous process that determines whether or not a
fund will make an investment.
• Frequently involves asking and answering a series of questions to evaluate the
business and legal aspects of the opportunity.
• Once the process is complete, the fund will use the outcomes of the process to
finalize internal approval process and complete the investment.
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CATEGORIES OF DILIGENCE
• Business
✓ Management
✓ Customers
✓ Processes
✓ Competitors
• Financial
✓ Accounting system
✓ Financial statements
✓ Debt
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• Legal
✓ Contracts
✓ Litigation
✓ Other risks

DILIGENCE IS “STAGED”
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Funds do not have
unlimited time &
money
Targets are shy

EXEMPLAR PROCESS
• NDA
• Initial due diligence
• First review with investment committee
• Non-binding LOI or first round bid
• Further due diligence with management
• Building internal operating model
• Preliminary investment memorandum
• Final due diligence
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• Update and final investment committee
approval
• Final binding bid
• Closing conditions (which may include
more due diligence)

DILIGENCE IS INSTRUCTED BY
FUND’S STRUCTURE
• Investment philosophy?
• Active or passive management?
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DUE DILIGENCE & PURCHASE
AGREEMENTS
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Due Diligence Reps/Warranties
Indemnification
Hold Backs
Earn-Outs
Litigation

ABOUT THE FACULTY
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Michele Itri – Itri@thsh.com
Michele Itri is the Co-Chair of the Tax Law Practice at Tannenbaum Helpern Syracuse & Hirschtritt
LLP. Michele Itri’s practice focuses on the tax and legal aspects of investment funds, financial
instruments, international transactions, corporate and real estate transactions. She works closely
with clients to structure transactions to achieve that most favorable tax results. Her practice
encompasses all aspects of federal, state, local and international taxation, with an emphasis on
onshore and offshore investment funds, venture capital transactions, corporate acquisitions,
financial instruments and real estate acquisitions and dispositions. Michele assists clients in the
structuring of onshore and offshore investment funds (such as general equity funds, fund of funds,
real estate funds, venture capital funds, distressed debt funds, arbitrage funds and global macro
funds) and in the structuring and organization of private partnerships and limited liability
companies (primarily investment management and real estate management companies and start-
ups). She is a graduate of Harvard Law School (J.D.1998) and Colgate University (B.A.1995).
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Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his
job simply: to make money for clients whenever possible and to protect their interests at every
turn. Licensed in four states, Jonathan’s transactional work focusses on representing private
funds and other owners of private businesses, and the businesses they own. He regularly
advises on M&A activities, structuring new ventures and restructuring old ones, and on other
commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10
by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State
University of New York at Albany, magna cum laude (in three years) and from the University of
Pennsylvania Law School. He clerked for a federal judge before entering private practice and
served for several years as an Adjunct Professor of Strategic Management at the University of
Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant
treatises, several chapters in other treatises, and scores of articles on law and business.
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Keith Bank – keith@kbpartners.com
Keith Bank is the founder and CEO of a sports/tech focused venture capital firm, KB Partners. He founded and
serves on the Board of Directors of Club Champion Golf and was the past Chairman of SteadyMed Ltd.
(NASDAQ:STDY). He also serves on the boards of Full Swing Golf, Phenix Real Time Solutions, ANGLR and
Hammerhead and oversees the firm’s investments in MVPIndex, Fan Compass and Shape Matrix. Mr. Bank
has been an active investor in various early stage and start-up technology companies in a wide variety of
industries, including the sports, semiconductor, medical, real estate, consumer and information technology
arenas. Mr. Bank previously co-founded and served on the Board and as President of MST Analytics, Inc.,
which was successfully sold to ATMI, Inc., a public company, in 1999.
Before forming KB Partners, Mr. Bank was a Principal at Hiffman Shaffer Associates, Inc., a Chicago-based
national real estate development, investment, management and brokerage firm. Other career highlights
include co-founding a chain of deep discount drugstores, acquiring and completing a successful turnaround of
a woman's apparel manufacturing and sales company, and procuring the equity and debt financing for and
producing feature films Tommy’s Honour (BAFTA Scotland Award Winner for Best Feature Film) and Heaven
Is a Playground.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/keith-bank/
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David Lorry – dlorry@versa.com
David S. Lorry is a Managing Director & Senior Counsel at Versa Capital Management, LLC
in Philadelphia. Mr. Lorry has more than 20 years of business and legal experience
advising clients in a range of industries, helping them solve a variety of business issues and
execute business transactions. Mr. Lorry began his professional career as an attorney,
practicing corporate, insolvency and commercial law for 7 years, after which he became an
investment banker.
Mr. Lorry has experience with bankruptcy, mergers and acquisitions, capital raising,
commercial lending, general corporate transactions, and related matters. He received his
undergraduate degree in from Duke University, cum laude, and earned his law degree from
George Washington University National Law Center, with Honors.
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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4

The Investor’s Guide to Alternative
Assets: The JOBS Act, “Accredited
Investing,” and You.
"The Investor's Guide to Alternative Assets: The JOBS
Act, “Accredited" Investing, and You" provides a
thorough, objective, and plain English introduction to
investing in alternative assets.
Chapters include overviews of angel investing and
venture capital, private equity, hedge funds, and so-called
"hard assets." An introduction to crowdfunding is included
to help you decide whether investing via a crowdfunding
portal is for you. Other topics discussed include the JOBS
Act itself; "alternative mutual funds," and a host of others
that will arm you with the information you need in order to
make educated investment decisions.
Available on Amazon Kindle and Financial Poise.com.

ABOUT FINANCIAL POISE
DailyDAC LLC, d/b/a Financial Poise™ provides
continuing education to attorneys, accountants,
business owners and executives, and investors. Its
websites, webinars, and books provide Plain
English, entertaining, explanations about legal,
financial, and other subjects of interest to these
audiences.
Visit us at www.financialpoise.com.
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