Chapter 5
Fund due diligencea
5.1 WHAT IS FUND DUE DILIGENCE?
Fund due diligence is a process that investors in the private equity asset class undertake to investigate and evaluate the investment premise of specific private equity funds. The main objective is to arrive at better investment decisions by following a rigorous stepwise investigation of specific investment opportunities.
The due diligence process can take several weeks to complete. It usually consists of a thorough analysis of the investment opportunity across several dimensions. Diligence normally focuses on five broad areas:
- The attractiveness of the investment strategy that the fund will follow
- The organization of the management company that will invest the fund
- The specific skills and attributes of the team that will make the investments
- The prior investment performance of this team
- The legal terms and conditions associated with the fund.
Diligence activities are both quantitative and qualitative: they involve data analysis as well as extensive qualitative research.
The evaluation of private equity funds is a challenging process, for two reasons. First, the fact that they are typically structured as private partnerships means that publicly available information is very limited. Unlike registered investment companies such as mutual funds, private equity funds are generally not forced to pass information on their investments and activities into the public domain. This makes it difficult to compare different funds ...
