FINANCIAL SERVICES

Operational
Due Diligence

Investment Management and Funds

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How KPMG can help you
Operational due diligence (ODD) over investment managers has never been more critical. Recent scandals such as Madoff and
Weavering have served to underline the growing importance of ODD in the minds of investors. Adding in other factors such as an
increasingly complex regulatory environment and the investors’ search for the alpha generating, operationally sound investment
managers becomes increasingly difficult. KPMG ODD specialists have extensive experience of conducting operational due diligence
procedures over a broad range of strategies, including hedge fund, infrastructure, private equity and traditional asset managers. Our
global network of ODD specialists and local subject matter experts challenge and assess key aspects of the target manager. These
aspects include tone at the top, compliance culture, risk management and conflicts of interest. We conduct a tailored set of due
diligence procedures to answer the questions that matter most to member firm clients.

KPMG’s ODD service offering

Drivers Basic
Basic Benefits of KPMG assistance

External • Summary of publicly available information • Practical expertise and subject

• Requirement to manage • Desktop identification of key relationships matter specialist challenge to
operational and reputational risk target managers
• Desktop financial stability analysis of
• Investment manager adherence investment manager • More informed decision making
to increasing complex regulation through market insights and
and regulatory expectation external benchmarking
• Manager fiduciary duties Intermediate (typical) • Global reach and expertise - in
across both asset classes and
Internal • All elements of Basic service financial markets (international
• Operational review, including site visit and local)
• Need to preserve market
reputation (see areas of coverage below) • Objective approach, consistently
• Interviews with key staff applied to different fund types
• Lack of internal resources to
conduct ODD • Inspection of documentation • Due diligence performed as
“agreed procedures” – investors
• Need for expertise with niche retain control over buy/sell
asset classes decisions
• Need for objectivity and Enhanced
• Work aligned to your investment
consistency • All elements of Basic and Intermediate service due diligence timing and/or fund
• Challenge and validation of • Corporate intelligence review of individuals, close deadlines
internal procedures including background and market reputation

Overview of KPMG’s approach

An approach tailored to your needs
KPMG ODD specialists provide advice and assistance on Operational Due Diligence to a variety of member firm clients across
the financial services industry including banks, fund distributors, pension funds, other institutional investors and Sovereign
Wealth funds. KPMG’s approach can be specifically tailored according to the needs of each client’s circumstances. The key
stages of KPMG’s approach to a “typical” scope review are summarized below and illustrated in the case studies that follow.
Our overall aim is to adopt a highly collaborative approach, drawing on both deep industry experience as well as insights gained
from our significant due diligence work.

Scoping/defining Documentation Service providers

On-site visit Reporting
procedures review review

Agreeing scope of Review of the fund’s Meetings with key staff Independent Reporting factual
procedures to be corporate documents, verification of service findings in a formal
performed prospectus, audited In depth discussions on providers identity and report
financial statements the management of the scope of services being
Defining reporting company, fund structure, performed Provide indicative
format, assessment Review of the manager’s investment execution scoring against agreed
benchmarks, logistics documents including processes, back office Meeting with the benchmarks (where
and timescales the compliance manual, operations and controls, service providers and required)
disaster recovery plan, pricing and valuation review of relevant
pricing policy, etc. This documentation
helps to facilitate our Performing walkthroughs
understanding of the of the key operational In depth discussions on
fund and manager and processes and controls services provided and
assists us in identifying and observing the controls in place
areas which may require operation of such
further clarification during controls
our on-site work Discussions with senior
Identification of management and review
service providers eg of oversight activities
administrators, auditors, over third party service
custodians, prime providers
brokers etc
© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Key areas of coverage
Just as investment managers and funds vary in size, complexity, and strategy, no two operational due diligence reviews
are the same. While we tailor our specific procedures to meet the particular needs of our clients and the type of fund/
investment manager subject to review, the typical areas we will examine, at a minimum, are set out below.

Intrinsic to our approach is a focus on:

• assessing conflicts of interest within the
manager as well as how their process
cial stability
to avoid/mitigate and continuously Finan
manager
monitor existing and emerging conflicts of e
th
of interest
• gauging the firm’s ‘tone at the top’ and s R
‘culture of compliance’

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at

an
• understanding the firm’s approach to

er

dc
op
risk management, and

om
an d
• ultimately, challenging the manager

p lian
to demonstrate that client’s/investor’s
interests come first. ng
Tradi

ce
ral Informa
ne

Ge

tio
n
Third

ure
par

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ty p

s tr
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in
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IT
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People

• Review of legal structure and • Review of audited financial • Risk Management framework
ownership statements • Compliance arrangements
• Review of fee arrangements • Review of cash flow • Internal controls over key
• Establish legal domicile of information operational processes
fund • Performing financial ratio • Personal trading and
• Review of terms and analysis against agreed insider dealing policies and
conditions benchmarks procedures
• Review of redemption • Valuation policy and
policies responsibility
• Identify key personnel • Review policies and
• Confirm identity of third and directors (including procedures over:
parties background checks) – Complaints management
• Management’s oversight/ • Remuneration – Conflict of interest
monitoring of key service – Insider dealing
providers:
– Internal fraud
– Administrators
– Trading errors
– Custodians
– Prime Brokers • Trading process and
– Auditors procedures • IT Infrastructure and Disaster
• Operational processes and Recovery
• Monitoring of other service
providers procedures • Business continuity

© 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Case Studies
KPMG firms work with a number of clients including fund distribution platforms, private wealth managers, family offices,
pension schemes and sovereign wealth funds. We have worked both in an outsourced capacity and alongside our firms’ client’s
in-house specialists. The case studies below highlight some of our experience, and we would welcome the opportunity to
explore how we can assist you.

Global Investment Bank – US Pension Fund

Structured Credit Division
Client issue
Client issue Our client, a U.S. pension fund, was enhancing its existing
Our firm’s client, the structured credit division of a global investment platform and associated investment strategy to
investment bank was looking to promote third party credit move towards ‘direct’ investments in private funds (hedge funds,
structured funds managed by external third party managers. private equity funds, real estate funds, infrastructure funds) and
The bank had concerns over reputational risk following the away from ‘indirect’ investments through fund of funds. As
collapse of Lehman Brothers and the high profile fraud case part of this evolution, our client’s Audit Committee requested an
involving Madoff. industry point of view on the content and structure of its current
operational due diligence program (“ODD”). In addition, our
KPMG services client was interested in how it would need to evolve its current
KPMG in the UK assisted with the development of a set of ODD program to respond to the increased complexity of direct
agreed due diligence procedures to be applied to a number of private fund investing (the ‘readiness assessment’).
third party managers and proposed funds. Such procedures
included: KPMG services
KPMG assisted our client’s Audit Committee, Chief Financial
• desktop review of general information Officer (“CFO”) and Chief Investment Officer (”CIO”) by
• desktop analysis over the financial stability of the target providing an operational due diligence (“ODD”) program
managers framework for their consideration. Our client requested
• on-site review of risk management arrangements and that KPMG conduct ODD on new hedge fund managers to
specific walkthrough procedures of key operational which our client was allocating direct investment capital.
processes and controls. KPMG implemented our ODD program (including proprietary
assessment and verification procedures with respect to 3rd
As part of our work, we agreed a set of performance party service providers) and provided reports of findings to
benchmarks against which we assessed the arrangements in the Audit Committee, CFO and CIO. In addition, our client
place at each manager/fund. The procedures were consistently participated in on-site fieldwork with KPMG’s subject matter
applied across a range of UK and European managers and professionals to facilitate knowledge sharing.
their related funds. Types of fund included hedge funds,
infrastructure funds, structured credit and distressed debt Benefits
funds. The results were then reported to the bank for each Through the implementation of an enhanced ODD program,
manager/fund. our client is well positioned to accelerate the re-positioning of
the current portfolio, emphasizing direct investments.
Benefits
By establishing a set of performance benchmarks, the bank was
able to objectively assess whether there was any excessive
reputational risk resulting from their commercial relationship
with each manager. The results of the ODD reviews enabled
the bank to satisfy its own risk management and assessment
procedures concerning the appointment of third parties.

Contacts

David Yim Troy Mortimer John Schneider Mark McKeever

Global Lead, UK Lead, US Lead, US Lead,
Operational Due Diligence Operational Due Diligence Operational Due Diligence Operational Due Diligence
KPMG in the UK KPMG in the UK Partner in the US KPMG in the US
T: +44(0)207 311 5973 T: +44 (0)207 311 5765 T: +1 617 988 1085 T: +1 267 256 1704
E: david.yim@kpmg.co.uk E: troy.mortimer@kpmg.co.uk E: jjschneider@kpmg.com E: mmckeever@kpmg.com

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Publication name: Operational Due Diligence. Publication number: 130414. Publication date: March 2014.