With constantly evolving regulations, a changing tax environment and growing investor demands it seems odd to write about operational due diligence facing any threats. In many ways, operational due diligence has never been so highly regarded or covered by so many different parties.
Yet, it is precisely because of the increased regulations and scrutiny from investors that a challenging environment has been created for anyone hoping to achieve comprehensive operational due diligence in a cost efficient manner.
The goal of any operational due diligence is to understand the overall risk culture of a manager and to avoid an investment that will suffer from poor operations or fraud. Threats to investors exist across the operational spectrum. Hidden fees can contribute to an overall decrease in returns. The lack of investment restrictions can cause a portfolio manager to invest beyond contractual controls. A lack of independent service providers can result in an inability to independently calculate NAV and create poor cash transfer controls. Inadequate insurance policies can leave both the manager and the fund exposed. And even the hint of a compliance issue or a regulatory fine can trigger a run on redemptions.
The reality is that the variety factors can make it difficult to produce comprehensive operational due diligence in a timely manner and at a fair and cost-effective price.
For today’s due diligence professionals, investing in processes and technology to carry out comprehensive due diligence in a time efficient manner is, in our opinion, an important and essential cost of doing business.
Our advice to investors is to resolve to evaluate their operational due diligence in 2015 by:
- Asking your operational due diligence team or provider what they have done to cover the increased scrutiny and expanding operational aspects related to regulatory compliance, best practice standards and risk management.
- Evaluate your team or provider’s technology and/or processes to ensure that they cover all aspects of operational due diligence in a cost-effective, yet comprehensive, manner.
- Most importantly, ensure that your team or provider are assessing the entire operations of the manager so that you can be confident in your understanding of the overall risk culture
At Laven Partners we have invested in processes and technology solutions to ensure that we cover all aspects of operationsfrom the manager to the fund, including the key individuals, service providers, insurance, front-to-back office workflow, risk management and compliance at a fair price. Our working environment is linked to either local laws or industry best practice standards from the MFA and AIMA for liquid investments or EVCA and ILPA for private equity.
As 2015 begins, we encourage investors to make a new year’s resolution to find out whether your due diligence standards are adaptable to the evolving regulations, legal and operational issues, to provide a true, yet cost-effective, assessment of operational risk.
Happy New Year!
The ODD Team
Jerome Lussan, CEO, Laven Partners
Tanja Ferri, Director, Laven Partners (Caribbean)
George Wood, Director, Laven Partners (US)
Alexandra Tzalla, Managing Director, Laven Legal Services Ltd
