PE Secondaries - Diligence Process?

When it comes to PE secondaries, the diligence process for fund-level investments differs significantly from direct investments in individual companies. Based on the most helpful WSO content, here’s a breakdown:

1. Outsourcing Diligence:

   • Unlike traditional PE deals where third-party advisors (e.g., Big 4) are often engaged for Quality of Earnings (QoE) reports, secondary fund diligence is typically conducted in-house. This is because the focus is on evaluating the fund's portfolio and the GP's track record rather than the financials of individual companies.

2. In-House Diligence Process:

   • VDR/Request List Process: The Virtual Data Room (VDR) is central to the diligence process. The request list often includes:
     • Fund performance metrics (e.g., IRR, MOIC).
     • Portfolio company-level data (e.g., valuations, revenue, EBITDA trends).
     • GP track record and historical fund performance.
     • Legal documents like Limited Partnership Agreements (LPAs) and subscription agreements.
     • Form PF (if applicable) for regulatory insights.
   • Access to Management of Portcos: Direct access to portfolio company management is rare in secondaries. Instead, the focus is on reviewing GP-provided materials and conducting reference checks on the GP.
   • Key Documents: Beyond the LPA and Form PF, other critical documents include capital call and distribution notices, audited financial statements, and fund cash flow models.

3. Comparison to Direct Investment Diligence:

   • Granularity: Fund-level diligence is less granular than direct investment diligence. For direct investments, you might assess revenue on a contract-level basis or conduct site visits, whereas fund-level diligence focuses on aggregated portfolio data and GP performance.
   • Third-Party Involvement: Direct investments often involve third-party advisors for tax, legal, and QoE reviews. In secondaries, third-party involvement is less common unless there are specific concerns about the fund's financials or legal structure.
   • Timeframe: Fund-level diligence can be faster since it relies on existing GP reports and aggregated data, whereas direct investments require deeper dives into individual company operations and financials.

4. Additional Considerations:

   • Risk Assessment: A significant part of fund-level diligence involves assessing the GP's ability to manage the portfolio and execute its strategy.
   • Market Diligence: Understanding the broader market environment and how it impacts the portfolio companies is also critical.

For more detailed insights, you might find this thread helpful: https://www.wallstreetoasis.com/forum/investment-banking/breaking-into-…</a">Breaking into Private Equity from Banking.

Sources: What does a model look like at a L/S hedge fund? What is the diligence process like?, What does a model look like at a L/S hedge fund? What is the diligence process like?, Breaking into Private Equity from Banking, HF to PE post-MBA - my story and seeking advice (long-time poster)!, https://www.wallstreetoasis.com/forum/investment-banking/breaking-into-private-equity-from-banking?customgpt=1