SUMMARY
The importance of operational due diligence for hedge funds has grown in recent years. But it is just as essential in private equity and real estate.
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Informamos que as comunicações verbais e por escrito do Citi podem estar em inglês, pois talvez não possamos fornecer comunicações relacionadas a serviços em todos os idiomas. Essas comunicações podem incluir, mas não estão limitadas a, acordos de contas, declarações e divulgações, mudanças nos termos ou taxas; ou qualquer serviço de sua conta. Se você precisar de ajuda em um idioma diferente do inglês, entre em contato conosco, pois temos serviços de idiomas que podem ser úteis para você.
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Please be advised that verbal and written communication from Citi may be in English as we may not be able to provide servicing related communications in all languages. These communications may include, but are not limited to, account agreements, statements and disclosures, change in terms or fees; or any servicing of your account. If you need assistance in a language other than English, please contact us as we have language services that may be of assistance to you.
Por favor, tenga en cuenta que las comunicaciones verbales y escritas de Citi podrían redactarse únicamente en inglés, ya que, tal vez, no podamos proporcionar comunicaciones relacionadas con los servicios en todos los idiomas. Estas comunicaciones podrían incluir, entre otras, contratos, divulgaciones y estados de cuenta, cambios en los términos o en los cargos, así como cualquier documento de mantenimiento de su cuenta. Si necesita ayuda en un idioma distinto al inglés, por favor, comuníquese con nosotros, ya que tenemos servicios de idiomas que podrían serle útiles.
Informamos que as comunicações verbais e por escrito do Citi podem estar em inglês, pois talvez não possamos fornecer comunicações relacionadas a serviços em todos os idiomas. Essas comunicações podem incluir, mas não estão limitadas a, acordos de contas, declarações e divulgações, mudanças nos termos ou taxas; ou qualquer serviço de sua conta. Se você precisar de ajuda em um idioma diferente do inglês, entre em contato conosco, pois temos serviços de idiomas que podem ser úteis para você.
请注意,花旗集团可能使用英文进行口头和书面通信,因为我们可能无法以所有语言提供与服务相关的通信。这些通信可能包括但不限于账户协议、账单与披露声明、条款或费用变更,或为您账户提供的任何服务。如果您需要英文以外的其他语言的帮助,请与我们联系,因为我们提供可能对您有帮助的语言服务。
The importance of operational due diligence for hedge funds has grown in recent years. But it is just as essential in private equity and real estate.
When selecting potential private equity and real estate investments, investors typically focus on the likely valuations at which managers will acquire companies or properties and the amount of debt they will use to do so. Such considerations fall within the investment due diligence process (IDD). They are clearly critical to determining an investment’s return potential. However, IDD is only one dimension of the comprehensive due diligence that needs to be performed. Rigorous operational due diligence (ODD) – assessment of the manager’s operational risk – is just as essential.
Operational risk is the prospect of suffering losses arising from a wide variety of failings in relation to private equity and real estate firms’ staff, controls, governance, processes, practices, and systems. The ODD process seeks to determine whether the manager’s operational infrastructure can support the investment strategy. Areas considered as part of this evaluation include appropriate governance and controls, costs and fees, key technologies, as well as conflicts of interests. As private equity and real estate vehicles typically demand multi-year commitments from investors,Citi Global Wealth Alternative Investments dedicated ODD team seeks to identify and mitigate such risks prior to investing.
Recognition of the existence of operational risks within hedge funds has grown over recent years. Such risks resulted in hedge fund investors’ losses, as we explained in our previous piece: Are you aware of hedge funds’ less obvious risks? By contrast, there has been less appreciation of operational risks in private equity and real estate firms. In 2022, the jailing of a North American private equity manager highlighted the importance of these issues. The manager was convicted of fraudulently taking out bank loans for his fund. To do so, he falsified documents including subscription agreements, audit letters and bank statements.
So, why are private equity and real estate managers – like hedge funds – subject to operational risks? Aside from select cases of outright dishonesty, a significant issue can arise from how such firms are set up. While they often possess significant expertise in investment matters, managers do not always have sufficient resources in vital auxiliary functions such as technology, information security or control functions. In the example above, the private equity firm admitted that the expansion of its back office functions hadn’t kept up with the growth of its funds.
When trying to identify specific investment opportunities, we stress the need for rigorous due diligence to address operational risks, specifically ODD. Due to the resources required and the complexity of risks that need to be assessed, it is important to have access to a private equity and real estate platform with a robust ODD framework. In our next article, therefore, we will set out what is required and how our dedicated Operational Due Diligence team approaches it.
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Alternative investments are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in the fund, potential lack of diversification, absence of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and advisor risk. Asset allocation does not assure a profit or protect against a loss in declining financial markets.
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Based on the information provided, we believe that a Citigold relationship may be most appropriate for your needs.
To find out more: Visit Citigold
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