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CHAPTER 4: Additional Operational Due Di... > CASH MANAGEMENT AND CONTROLS

CASH MANAGEMENT AND CONTROLS

Some investors consider cash to be one of the crucial areas to be focused on in an operational due diligence review. The thinking goes that cash flowing through a private equity firm is effectively the lifeblood of the organization. Without cash to call from investors, invest, or pay bills, there is little concern, the thinking goes, for the rest of the operational infrastructure of a firm. Certain operational due diligence reviews may even take a follow the cash approach, whereby the flow of cash from investor subscriptions through to redemptions are tracked.

Over the past several years, a trend had emerged of alternative investment firms seeking to outsource the cash management function in some regard. Part of the reasoning behind this trend is similar to our discussion of the use of placement agents: An alternative investment manager may feel they are capable of placing unencumbered cash into a checking account or in a money market fund; however, some funds may not have the skills, time, or resources to be focused on generating increased return from this cash. In effect, these firms may be leaving money on the table as a result of excess cash sitting around earning lower rates of return.


  

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