Operational Due Diligence: Identify Red Flags Before Committing To An Alternative Investment
May 2021 - Hedge Fund
To access the entire post click here.
The recent story broken by the Miami Herald on JES Capital highlights how important it is for institutional investors to conduct thorough operational due diligence (ODD) for all alternative investments including private equity. In this case, allegations claim JES forged signatures on subscription agreements totaling $85 million to secure a subscription line of credit.
While subscription credit facilities are commonplace, they do expose limited partnerships (LP) to risk. As the National Law Review notes, “In the JES case, the key question is who ultimately bears responsibility for repayment of the fund’s debt. If there are genuine investors in the fund, then under typical documentation such investors will be obligated for the debt of the fund on a pro rata basis up to the amount of their unfunded capital commitments. This would depend on the exact wording of the fund’s limited partnership agreement, but it is not unusual for investors to be required to fund drawdown notices without set-off, counterclaim or defense.”
To access the entire post click here.