The capital allocator’s due diligence process is a fundamental and integral part of investing in external asset managers; yet both the manager research and the investor relations teams spend much of their time on administrative tasks of gathering and organising paperwork and documents.
As the industry evolves, the need for due diligence continues to increase, with three areas being impacted the most:
- Investment due diligence has become more complex and varied, with investors diversifying investments to more asset classes and requesting additional information.
- Operational due diligence is now mandatory since the pandemic, and additional regulations and compliance requirements are coming into place across Europe.
- Environmental, Social & Governance (ESG) questions are now top of mind and are required to be answered to drive towards more sustainable and inclusive investments. Are you ready for the SFDR regulation?
With all the additional questions and answers, the means for information exchange, audit, storage, and meaningful analysis have not kept pace with the sheer volume of requested information.
Due diligence process
Traditionally, data is collected in the diligence process through the following mediums:
- Some researchers rely on a series of due diligence questionnaires (DDQs) or requests for proposal (RFPs) that are filled out by the asset managers in Word documents, Excel spreadsheets, or other questionnaire templates and collected in email inboxes, data rooms, or shared drives.
- Others rely on third-party databases where data can be incomplete, dated and is dependent on what the asset managers are willing to disclose, knowing that it’s for a broad distribution.
- The rest rely solely on the standard marketing materials, DDQs and related documents issued by the asset managers. They are often in PDF formats forcing investors to spend hours manually extracting the most important data points at the expense of the more granular details.
The result is a fragmented due diligence process that is quite onerous, rife with inefficiencies, and full of pain points. The burdensome administrative tasks take away the time that researchers should spend on high-quality value-added analyses.
Whether you are a fund selector, a fund buyer or an asset owner, below are five recommendations on how you can leverage technology to make the due diligence workflow less costly and more efficient.
1. Invest in your data
Structure the data that you collect. This prevents you from being solely dependent on manager databases and a collection of PDFs scattered across emails and shared drives. More importantly, it’s an investment in your digital future and baseline for machine learning algorithms.
2. Be part of a digital diligence platform (DDP).
Leverage a platform that benefits both diligence parties. Sometimes standard questionnaires are preferred, other times you need something custom and a centralized platform makes it efficient for all. Looking back at 2020, in addition to standard investment monitoring, at DV we oversaw tremendous information flow between investors and asset managers: pandemic monitoring, LIBOR transition, sector rotation queries, D&I focus, SolarWinds breach, return to work surveys across 5000+ asset managers.
Leverage a platform that benefits both diligence parties. Sometimes standard questionnaires are preferred, other times you need something custom and a centralized platform makes it efficient for all. Looking back at 2020, in addition to standard investment monitoring, at DV we oversaw tremendous information flow between investors and asset managers: pandemic monitoring, LIBOR transition, sector rotation queries, D&I focus, SolarWinds breach, return to work surveys across 5000+ asset managers.
3. Make it easy for your investment partners
Reduce friction in the diligence process with your managers by offering reusability of their content and tools to improve online collaboration. While we are working from home, juggling work with home schooling, helping your managers save time and reduce the duplication of documents and emails and therefore the risk of errors is a must.
4. Be a leading investor
Finding alpha has become harder, and avoiding downside risk is more important in an environment where new risk types are developing. Clean, usable, and readily available data makes it easier to analyse and identify downside risks or warning flags, and also identify defensible investing opportunities faster.
5. Technology is an equalizer
Whether you are a team of 20 research analysts, or a team of two or three, with the right technology, you can scale and incorporate the research rigor to reflect your process and investment philosophy.
Ultimately, a DDP propels the industry forward and drives efficiency. It serves up a better experience for both sides of the market, the investor as the requestor and the asset manager as the respondent, thus creating a win-win scenario for all parties involved. Less time is spent on repetitive tasks, and greater time is spent collaborating internally or with investment partners. This leads to greater efficiency and also satisfaction for everyone involved in the data collection process. With over 18,000 users globally, DiligenceVault is leading the charge for a new collaborative digital diligence platform that we all need.
