Operational due diligence jobs: the art of unearthing poor behavior in private markets
If you’re a private equity professional, you’ve probably spent your fair share of time grilling executives for an investment. But would you be willing to grill your own boss?
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If you work in operational due diligence for investors in private capital companies, that’s exactly what you do – question executives in private equity firms and hedge funds about their operational structures. But how does that work exactly?
Helen Rexwinkel is a director in operational due diligence (ODD) services at PKF O’Connor Davies. She joined the firm just over a year ago after 16 years at Aberdeen Asset Management (now Abrdn), including as its global head of ODD. She's worked in ODD for 15 years.
“Operational due diligence is, fundamentally, assessing operational risk of making an investment in a private equity or hedge fund,” Rexwinkel explains. Operational risk is very different to investment risk; it involves “business risk, financial risk, reputational compliance, legal, cyber, and technology.”
While the business has existed for a long time, it took off in earnest after the Madoff scandal. “Madoff spurred the development of ODD and [showed] why it is important,” Rexwinkel says. “It's important to sit across the desk from your clients and actually ask them about how they measure risk - not just asking them a yes or no question, but actually asking the how, what, and why, questions.”
That level of nitty gritty analysis is not unheard of for private equity professionals, for whom due diligence involves site visits and board interviews to better understand a new investment opportunity (or an investment already made). ODD is the mechanism by which a general partner investor (such as a pension fund or family office) does the same thing for its investment in a hedge fund or private equity firm.
The most exciting parts of the job are probably the most personal ones. “We do reputational checks,” Rexwinkel says. This involves a background check of key people at a firm, mostly for litigation and “adverse” social media posts. “If someone comes back with 40 speeding offenses, it raises a flag. What is the integrity of this person? Do they really want to pay attention to the law?”
Her team additionally found some civil litigation which showed that the manager "really didn't have the sort of personality and integrity that you would want to be doing business with.” Pulling out of an investment due to an investment manager’s legal history might seem excessive, but Rexwinkel says that it can pay dividends: “We decided not to make an investment, and then a few months later, the fund collapsed because there were several cases against him for sexual harassment.”
It’s not just about a trail of evidence, either. It can be about “dominant personalities”, as Rexwinkel calls them. “If you ask a CFO a question and the CEO steps in and responds, then you question what is really going on at a firm.” A dominant personality can have wide reaching implications. “What influence do they have over things that really should be segregated, such as functions, compliance, or risk?”
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