Purpose
The purpose of an ODD exercise is to gather, analyse and (to a degree) verify information relating to operational risks to:
• allow an investor in a specific alternative investment fund to form a considered view as to whether to remain invested or to divest, or
• allow a potential investor in a specific alternative investment fund to form a considered view as to whether to invest or not, and
• (ideally) identify conditions which the investor or potential investor may seek to negotiate to reduce the overall level of operational risk associated with a new or existing investment in such specific alternative investment fund.
A small sample of the items which may be included within the scope of an ODD are outlined below:
• mark to market valuation techniques, and related processes/controls and disclosures
• business continuity and disaster recovery planning
• fraud risk and other irregularities
• behavioural analysis of individuals (e.g. fund directors and employees/principals of the manager of the alternative investment fund) and outsourced service providers, including their incentivisation
• liquidity mechanisms (“lock-ins” and “gates”)
• security of assets
• legal review, covering (amongst others things) design and establishment of the legal structure, advice taken by the alternative investment fund and its manager, material contracts, investment terms, indemnifications and insurances (although this may be performed as a separate Legal Due Diligence)
• review of the controls and processes employed by the fund through its main outsourced service providers (investment manager, fund administrator, transfer agent, etc.) over the management of fund assets to establish whether these are fit for purpose and being followed
• review of the operating processes and record-keeping supporting tax relating to maintaining beneficial tax treatment or "keeping the fund offshore".
Read more about this topic: Operational Due Diligence (alternative Investments)
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