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Home > Asset Management Best Practice > Private Equity Fund Monitoring and Risk Management

Asset Management Best Practice

Private Equity Fund Monitoring and Risk Management

by Rainer Ender

Executive Summary

  • Private equity fund monitoring is a continuous screening of the fund manager’s development and the fund’s progress, within the context of a top-down and bottom-up market analysis.

  • Once implemented, a well-structured private equity monitoring framework, composed of qualitative and quantitative elements, facilitates an assessment addressing two dimensions; the manager and the fund.

  • A consistent set of monitoring and benchmarking elements is essential for a coherent assessment of both the single funds and the aggregate portfolio, forming the basis for risk management.

  • A functioning monitoring process enables investors to keep control over their private equity portfolio, and take appropriate action where needed. Early risk identification and active involvement are crucial in order to secure maximum value for their investments.


Private equity fund commitments tend to be long-term investments of approximately 12 years. The fund’s life consists of three general phases:

  • Investment phase: deal origination, due diligence, investments;

  • Value creation phase: (re-)positioning the investments for success;

  • Harvesting phase: divesting portfolio companies.

Private equity monitoring is a continuous process of tracking the fund’s progress and the fund manager’s development. The goal of the process is to maximize the investment value and the relationship with the fund manager. Monitoring the current investment is an integral part of due diligence for the investment decision regarding the fund manager’s next fund. Due diligence also has a deep monitoring effort on prior fund investments.

An effective private equity monitoring framework is a fine-tuned combination of quantitative and qualitative monitoring elements, based upon the systematic gathering of information and intelligence, supported by a robust IT platform. The information gathering and evaluation must be embedded in an overall monitoring framework. That framework must address concern/comfort levels with regards to funds and fund managers, and trigger which related actions are to be taken by the investor.

A Multi-Dimensional Private Equity Monitoring Framework

The monitoring process of private equity fund commitments is at the fund level, and is focused on the progress of the portfolio companies and financial performance. At the fund manager level, the investor concentrates on the manager’s structural and behavioral developments, such as adherence to the strategy, governance structures, compliance with the terms of the partnership agreement, and the value contribution to the underlying portfolio companies.

It is important to highlight that monitoring involves far more than simple performance control. Monitoring identifies needs for action, and takes the measures needed to secure the best interest for the investor. A simple “traffic lights” concept relating to fund and fund manager illustrates the structured monitoring approach.

Four different monitoring situations can emerge from a private equity fund investment.

  1. There is no reason for concern on both fund and fund manager level. The fund is developing on or above plan, and there are no disturbing developments from the manager side. The investor has a sufficient level of comfort on both aspects.

  2. Concern about the fund but comfort with the fund manager. This situation can emerge due to negative external market effects/shocks. The impact of the negative effects on the underlying portfolio has been identified, analyzed, addressed, and communicated proactively by the fund manager in a timely manner. Nevertheless, a first escalation level for the monitoring activity is appropriate in such a situation, and can be summarized as follows. Actively support the fund manager to correct deviation. An intense dialogue with the manager and corrective measures are needed. When close interaction with the fund manager provides sufficient assurance that the required measures are taken, no special action may be needed beyond closer monitoring of the development.

  3. Comfort with the fund, concern with the fund manager. This often occurs in the context of team issues at manager level, or deviation from the strategy (as a fund or as a manager). The future of the fund is at risk; this triggers the second level of escalation. Put pressure on the fund manager to take corrective actions.

  4. Concern with the fund, concern with the fund manager. This development represents the worst situation. The fund appears to develop below plan, and the investor has clear indications that the manager does not cope with the situation properly. The third escalation level is the most rigorous escalation step. Mitigate open risks and reduce exposure, for example join forces with a sufficient base of investors, and limit the fund size.

During a fund’s lifetime, the emphasis and focus of the monitoring process shifts through phases, due to the changing information requirements and the change in options for actions.

Investment phase: the main focus is on the current and future investments, and whether they are aligned with the declared strategy and value contribution concept of the fund manager. Furthermore, the developments of the fund manager (such as team broadening), and the progress in the older portfolio are important elements for fund-manager monitoring.

Value creation phase: the fund monitoring emphasis shifts towards the progress in the portfolio companies, their valuations, and the resulting interim performance. Manager monitoring focuses on value contribution to the portfolio companies, and the resources made available to support the companies.

Harvesting phase: during the fund’s lifetime, this is the real “moment of truth.” Fund monitoring focuses on the success of the divestment process for portfolio companies, and related up- or down-valuations relative to the book value. Manager monitoring during this phase concentrates on the peer-group comparison, especially on performance benchmarking in a risk/return context.

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Further reading


  • Mayer, Thomas, Pierre-Yves Mathonet. Beyond the J Curve: Managing a Portfolio of Venture Capital and Private Equity Funds. Chichester, UK: Wiley, 2005.
  • Müller Kay. Investing in Private Equity Partnerships. The Role of Monitoring and Reporting. Heidelberg, Germany: Gabler Verlag, 2007.

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