Private Equity Compliance

CHAPTER 10Limited Partner Analysis of Private Equity Compliance Functions

10.1 A COMPLIANCE EVALUATION IS PART OF THE OVERALL DUE DILIGENCE PROCESS

When an investor in a private equity fund is considering allocating to a general partner (GP) they go through a process of collecting and reviewing information from the GP. This process is known as due diligence. At a high level, due diligence can be segregated into two distinct areas. The first is investment due diligence (IDD). IDD focuses primarily on the investment-related aspects of the private equity funds. The second category is operational due diligence (ODD).

As contrasted with IDD, ODD focuses primarily on non-investment-related aspects of a fund's management. This due diligence process should also include an analysis of the compliance function in place. These compliance reviews have traditionally been more centered in the realm of ODD as opposed to IDD; however, there is increasingly an overlap between the two areas. The reason for this is many of these other areas covered during the larger due diligence process, while not directly part of the compliance function, have compliance elements or directly overlap with compliance.

10.1.1 Focus on GP Compliance

Throughout this book we have outlined the three tiers across which compliance procedures can be implemented:

1. GP level compliance
2. Fund level compliance
3. Portfolio company compliance as it relates to the GP and funds

When a limited partner (LP) sets out to evaluate the ...