need for operational due diligence, kpmg case study,hedge fund case study pension fund kpmg case study

2. OPERATIONAL DUE DILIGENCE
Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a
target company.
INTRO: -
• To run business smoothly
• Enhance your enterprise’s value
• Better understand the processes

3. PURPOSE: -
• The Operational due Diligence review looks at the main operations of the target company and attempts
to confirm (or not) that the business plan that has been provided is achievable with the existing operational
facilities plus the capital expenditure that is outlined in the business plan.
• The ODD review will consider whether there is the potential for additional value to be wrought out of the
target company by improving its operational function and also whether there are serious operational risks
about which the potential buyer should be concerned.

4. PERFORMER :-
1- An ODD review is often performed by a third party such as a professional services firm
• Law Firms
• Insurance Firms
• Real Estate Brokerage
2- Requested by the bank or other financier that is supporting the acquisition
Focused : -
ODD activities are often focused on analysing the supply chain, engineering, and manufacturing operations of a
target acquisition in detail.

5. Need for Operational Due Diligence
 To validate the operational improvements in projections
 For a potential, up-side that will give you an advantage over other buyers
 To integrate operational due diligence with financial & commercial due diligence to achieve integrated business due
diligence
 To increase transparency to reveal the operational reality behind the financials
 To highlight risks & value-enhancement potential
 To carry out an in-depth analysis of value adding & supporting operations

7. KPMG OPEEATIONAL DUE DILIGENCE
KPMG ODD conduct operational due diligence procedures over a broad range of strategies, including
hedge fund, infrastructure, private equity and traditional asset managers.
KPMG’s approach

8. KPMG deal with operational due diligence issue
KPMG services : - KPMG in the UK assisted with the development of a set of agreed due diligence procedures to be
applied to third party managers and proposed funds. Such procedures included:
• desktop review of general information
• desktop analysis over the financial stability of the target managers
• on-site review of risk management arrangements and specific walkthrough procedures of key operational processes
and controls.
Types of fund included hedge funds, infrastructure funds, structured credit and distressed debt funds.
CASE- 1
Client Name : - Global Investment Bank – Structured Credit Division
Client Issue : -To promote third party credit structured funds managed by external third party managers.They had
concerns over reputational risk following the collapse of Lehman Brothers and the high profile fraud case involving
Madoff.

9. Benefits to client-
Global Investment Bank – Structured Credit
Division
 Bank was able to objectively assess whether there was any excessive reputational risk resulting from their
commercial relationship with each manager.
 Enabled the bank to satisfy its own risk management and assessment procedures concerning the
appointment of third parties.

10. US Pension Fund

11. CASE 2-
Client Name : - US Pension Fund
Client Issue : - Needs to enhance its existing investment platform and associated investment strategy to move
towards ‘direct’ investments in private funds away from ‘indirect’ investments through fund of funds
KPMG Service: -
• Set up of new ODD programme related to their consideration
• Conduct ODD on new hedge fund managers to which our client was allocating direct investment capital.
• Proprietary assessment and verification procedures with respect to 3rd party service providers
• Provided reports of findings to the Audit Committee, CFO and CIO
BENEFITSTO CLIENT: -
Through the implementation of an enhanced ODD program, our client is well positioned to accelerate the re-
positioning of the current portfolio, emphasizing direct investments.

13. WhyDue
Diligenceis
Important
forM&A
 To confirm all material facts related to the Business
 To reduce the Risk of post-transaction unpleasant surprises
 To confirm that the business is what it appears.
 To Create aTrust between two Unrelated Parties
 To gain information that will be useful forValuingAssets
 Negotiating Price Concessions
 To verify that the transaction complies with investment or acquisition
criteria.

14. ROLE OFOPERTIONAL DUE DILIGANCE IN M&A
Covers full scope of business operations from supply chain and logistics to manufacturing and commercial
activities
Ensures that sufficient work is done on some of the operational assumptions that are key to the success of a
deal
Key outputs:
• Assess operational effectiveness
• Identify and quantify opportunities for operational improvement and develop action plans to deliver against
these opportunities
• Assess existing management structure and provide insight on personnel related issues