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EdrawMindLecture 4 Due diligence framework and practice on operational capabilities of private equity managers
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Lecture 4 Due diligence framework and practice on operational capabilities of private equity managers
ODD (Operational Due Diligence) operational capability due diligence. This course teaches how to conduct comprehensive due diligence on private equity managers through five dimensions, including entity strength, ownership structure, related parties, compliance and internal control, and transparency.
Edited at 2024-01-28 14:24:10- One Hundred Years of Solitude Character Relationship Chart
One Hundred Years of Solitude is the masterpiece of Gabriel Garcia Marquez. Reading this book begins with making sense of the characters' relationships, which are centered on the Buendía family and tells the story of the family's prosperity and decline, internal relationships and political struggles, self-mixing and rebirth over the course of a hundred years.
- One Hundred Years of Solitude Character Relationship Chart
One Hundred Years of Solitude is the masterpiece of Gabriel Garcia Marquez. Reading this book begins with making sense of the characters' relationships, which are centered on the Buendía family and tells the story of the family's prosperity and decline, internal relationships and political struggles, self-mixing and rebirth over the course of a hundred years.
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Lecture 4 Due diligence framework and practice on operational capabilities of private equity managers
- One Hundred Years of Solitude Character Relationship Chart
One Hundred Years of Solitude is the masterpiece of Gabriel Garcia Marquez. Reading this book begins with making sense of the characters' relationships, which are centered on the Buendía family and tells the story of the family's prosperity and decline, internal relationships and political struggles, self-mixing and rebirth over the course of a hundred years.
- One Hundred Years of Solitude Character Relationship Chart
One Hundred Years of Solitude is the masterpiece of Gabriel Garcia Marquez. Reading this book begins with making sense of the characters' relationships, which are centered on the Buendía family and tells the story of the family's prosperity and decline, internal relationships and political struggles, self-mixing and rebirth over the course of a hundred years.
- Project Management Process Template
Project management is the process of applying specialized knowledge, skills, tools, and methods to project activities so that the project can achieve or exceed the set needs and expectations within the constraints of limited resources. This diagram provides a comprehensive overview of the 8 components of the project management process and can be used as a generic template for direct application.
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- Outline
Due Diligence Framework and Practice for Private Equity Managers’ Operational Capabilities
introduction
Current status of the private equity industry
More but not fine, big but not strong;
A mixed bag of good and bad, real and fake private equity coexist;
Violations of laws and regulations and risks occur frequently.
Nearly half of private equity managers have less than 50 million
Current regulatory status of the private equity industry
The private equity fund industry has entered an era of standardized and strong supervision.
three stages of development
Moderate supervision, focusing on self-discipline (before 2013 Sunshine Private Equity-2018 Asset Management Regulations)
Moderately strict, sum up experience, and collide with multiple values and concepts (from the beginning of 2018 asset management regulations to 2021)
Strengthen supervision, prevent and control risks, support excellent services, and standardize development (2021-present)
Private equity managers’ “going out is greater than coming in” has initially emerged
Classification of asset management products and managers
Three-level evaluation system for private equity managers
ODD (Operational Due Diligence) operational capability due diligence
ODD framework
definition
ODD (Operational Due Diligence) refers to the operational due diligence conducted by private equity fund investors (including FOF), third-party investment consultants, rating agencies and other relevant parties on private equity funds.
Almost all content except investment research
Manager dimension
The fund manager’s equity structure, hardware facilities, system platform, financial status, compliance status, service providers, etc.
product dimension
The structure, terms, assets, liquidity, etc. of the private equity fund itself
Target
Identify fraud risks
Fraud risk refers to the risk caused by managers violating the fiduciary duty of loyalty and infringing on the rights and interests of investors through abuse of power, transfer of interests, etc.
Cases: 10 billion FOF, 3 billion private placement, LG fund misappropriation, Bayou fund fraud case.
Identify internal control risks
Internal control risk refers to risks such as business stability risk, business continuity risk, financial risk, compliance risk, liquidity risk and other risks caused by the manager's breach of fiduciary duty of care due to chaotic organizational structure and weak internal control management.
Case: The tens of billions of private placement YX bonds have been hit hard one after another, and the Bahrain Bank and Everbright Securities self-reporting incidents
Comparison: The connotation of ODD is richer than compliance, risk control and internal control assessment.
Building Principles
1. Comprehensive evaluation principle
2. Principle of regular review
3. Cost-effectiveness adaptation principle
4. Cross-validation principle
5. Principle of transparency
6. Principle of market adaptation
7. The principle of evolution
8. One-vote veto principle
due diligence method
Written due diligence
Written material verification
Due diligence questionnaire, anti-money laundering questionnaire, promotional materials (if any), official website introduction, licenses, audit reports, association credit reports, systems, internal control self-examination reports (if any), regulatory documents (if any), etc.
Public information verification
National corporate credit disclosure system, information disclosure on the Fund Industry Association website, China Judgments Network, People's Court Announcement Network, China Enforcement Information Disclosure Network, Credit China website, securities and futures market breach of trust record inquiry platform, China Securities Regulatory Commission website, exchange website, etc. and internal database
On-site due diligence
On-site visit
Office environment (such as office space, whether it is independent and stable, scale, staffing, equipment, corporate culture, etc.), transaction process, risk control system operation, isolation of related parties, original certificates and awards, etc.
Personnel interviews
Focusing on key points such as ownership structure, organizational structure, professionalism of compliance and risk control personnel, effectiveness of risk control, implementation of internal control, negative issues, etc., focus on cross-verification of different interviewees
Assessment criteria (coinciding with regulatory policies)
ODD points
Subject strength
Equity structure
The equity structure requirements for newly registered private equity fund managers have increased year by year, moving closer to licensed institutions.
2014
Registered shareholder
2018
Major shareholders and actual controllers have been stable for 3 years
2019
Holding on behalf of others is strictly prohibited
2021
Circulation, cross-investment, and complex structures are prohibited
2023
Limited experience and position
The equity structures of surviving private equity fund managers are complex and diverse.
private
personal control
Wholly owned holding ≥90%
One share dominates ≥67%
Absolute holding >50%
Dispersion balance ≤50%
Team control
Group control
external control
State-owned assets
foreign investment
Assessment Points 1
Shareholder qualifications
Qualifications and employment status of natural persons, and organizational strength
Is it clear?
Structural complexity, rationality, whether it can be penetrated and identified, and whether there is an agent
Is it stable?
Whether the identity ratio is reasonable, whether there is an incentive function, whether it is too centralized or decentralized, whether there are frequent changes, whether there is pledge freezing and gambling, whether there are equity disputes
Registration requirements
The capital contribution structure of a private equity fund manager should be concise, clear, and stable. There should be no excessive levels, complex structure, etc. Without reasonable reasons, a nested structure of two or more layers should not be established through special purpose vehicles, and no nested structure of two levels or more should be established through the establishment of special purpose vehicles. Ways to circumvent the financial, integrity and professional capabilities and other relevant requirements for shareholders, partners, and actual controllers.
The actual controller must not have any relevant experience in operating, managing or engaging in asset management, investment, related industries, etc., or the relevant experience must be less than 5 years.
If the actual controller is a natural person, he shall serve as the legal representative, senior manager or executive partner of the private equity fund manager and his or her designated representative, unless otherwise provided.
The legal representative, executive partners and their appointed representatives, and senior managers responsible for investment management shall collectively hold a certain proportion of equity or property shares of the private equity fund manager, and the total paid-in capital shall not be less than the actual paid-in capital of the private equity fund manager. 20% of capital. Or not less than 20% (2 million yuan) of the minimum paid-in monetary capital (10 million yuan).
Assessment Points 2
Rejection of agency holding: Risks of agency holding of equity
Moral Hazard
Responsibilities cannot be traced, and "negative incentives" are lacking; disclosure of major related transactions is avoided, and conflicts of interest and interest transfer are prone to occur.
Assess tracking risks
Due diligence lacks transparency, making it difficult to understand and verify the true investment status and governance structure. Major equity and personnel changes can avoid disclosure and cannot provide early warning.
stability risk
The agent holder arbitrarily disposes (transfers, pledges) the equity held by the agent, or the equity is frozen or executed, causing negative situations such as changes in the manager's actual equity or equity disputes, affecting the continuity and stability of the manager's operations.
Compliance risk
Violation of the registration instructions for private equity fund managers is strictly prohibited from the requirements for entrustment and anti-money laundering penetration to identify the ultimate beneficiary.
Pledge freeze suspended
Rejection of recurring investment
Related party
Compliance and internal control
transparency