Part 1: Investors
Laven Managing Director and Head of Investment Product Due Diligence George Wood shares a few insights into performing operational due diligence reviews in light of the COVID-19 pandemic.
Investments and due diligence must go on, yet we are living in a ‘new’ paradigm and the need for a primarily remote workforce will likely continue for an extended period. No matter the planning, this will present unforeseen challenges.
Being optimistic we hope that the current global situation will ease in as little as two to three months, but in reality it is likely to be closer to a year before life, especially in regards to travel, fully returns to normal. From an operational due diligence perspective, this means having to adapt to being unable to conduct on-site visits while maintaining the same standards for the due diligence process.
Below we set out some early insights for investors to consider whilst migrating to remote due diligence reviews.
1. Be human.
Both investors and fund managers are having to adapt. Embrace this change, as a modern business, there are different ways to collect the information you require. Recognise that there are a lot of new stresses (e.g. working from home, dealing with volatile market conditions, schooling children) and thus peoples working hours and processes may change. Ultimately, investments in a fund/product, are about having confidence in the individuals and the team so take this as an opportunity to learn a little more about the people who you will entrust with your allocation.
2. Some things might not be verifiable. Listen and ask more questions.
One of the main reasons we conduct on-site visits is to be able to review documentation, systems, and information that is only available on-premise. Even in 2020, some important information may not be available electronically, such as results of penetration testing or access to confidential materials usually only opened up in situ. To gain comfort, investors should ask questions that allow the manager to demonstrate the required depth of their work/materials and which test the knowledge of the outcomes and actions that came as a result of their internal processes. An investor should ask about outcomes that the fund manager can share like screenshots that evidence that the relevant internal process is followed.
3. Try to understand how things have changed and that it might not be temporary.
As noted above, we need to recognise that remote working might not be just short term or even temporary. Try to understand and document how organisations are approaching this change. Detail what procedural controls they have put in place. Furthermore, be wary of a fund manager who claims to have had minimal impact from their change to a fully remote workforce. The change we are undergoing is not just about access and systems, it’s also about continuing to maintain operational oversight, compliance and supervision. Finally, it is worth remembering that in some instances change can be an improvement.
4. Document collaboration tools. Understand what infrastructure is new and what was in place.
It is worth exploring how organisations are thinking and adapting to a long term remote working solution. One way to understand this is to assess how businesses are changing their approach to collaboration tools and how their team are using them. Investors should check if the tools were in place prior to the outbreak or whether they have been implemented only in recent weeks in which case more questions to test the outcome are recommended. In line with that, check regulators’ recent updates, for example, on telephone recording of trades, the need to report continuously on trade positions or adaptation to the ban of shorting in some countries.
5. Don’t penalize organisations for adapting and working to figure things out
A due diligence review is about transparency, honesty and gaining comfort with the firm and individuals who will manage your allocation. Avoid penalizing managers for being transparent and acknowledging that during this unprecedented time they face certain operational and supervision challenges. In our view, it may prove more sensible to worry about the ones who do not acknowledge business has changed. Investing is about creating a relationship, one could argue that the investment managers acknowledging the challenges that lay ahead are forward-thinking and the transparency a positive sign.
As we continue to adapt we will share our thoughts and what we learn on the ground. We have already carried out a few remote due diligence and have found the response from managers positive and trustworthy. The workload is slightly higher and it is harder to test procedure but with a good process and the right organisational tools, we believe remote product due diligence will remain as useful as before and even more important as investors may not get the chance to meet managers as they were used to.
Click here to find out more about Laven’s Due Diligence Services.
