The Importance of Evaluating Reputational Risk During an Operational Due Diligence Review

It has been alleged that records reviewed by Reuters show a detective working for Rupert Murdoch’s British newspapers used questionable means to obtain private equity manager, Robert Agostinelli’s hotel bill.

Regardless of how this bill was obtained, it exposed Agostinelli’s life and what should be his private, personal hotel bill. Even though the bill only revealed the cost of the hotel room per night and a couple of other things, it still made Agostinelli a small focus in the media.

Investors should keep in mind a manager’s reputation before investing. During the course of an operational due diligence review one of the areas which should be vetted by investors relates to reputational risk. In Agostinelli’s case there is nothing inherently reputationally wrong with staying at a high priced hotel. However, investors in funds managed by Mr. Agostinelli may not like that his name (and most likely the fund by association) is showing up in the papers.

Reputational Compliance

Reputational Compliance

Sometimes the fact that a manager is in the media at all could make investors weary. Keeping with the phrase “no news is good news,” it often raises questions when someone makes news, whether it is positive or negative, because focus and attention is being brought to them and their firm. This is especially damaging when people are in the news only because of someone else’s faults.

In this case, Murdoch newspapers did not obtain Agostinelli’s hotel bill under exceptionally honest circumstances. In fact, they had a private detective “misrepresent themselves” to obtain the bill. Steve Whittamore, who was the private detective in this situation, was convicted of trading in illegally obtained information but did not serve jail time.

Reputational risk is just another subject that may get over looked during an operational due diligence review, but is a crucial part of a full review.

By looking into private equity firm employees’ reputations, as well as their media presence, may raise yellow flags that cause the due diligence consultant to potentially use background investigation services to research the yellow flags in greater detail.

Looking at things like reputational risk during an operational due diligence review is a great starting point to assessing the possibility of deeper rooted issues within the firm.

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