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EisnerAmper’s CFO Roundtable-Operational Due Diligence: Is Your Firm Prepared to Pass?

Jan 20, 2017

Industry Veteran Michael Merrigan, Founder & Managing Member, Shadmoor Advisors LLC weighs in on how managers can best prepare to pass a comprehensive operational due diligence process and better position themselves to raise capital.

The operational due diligence (“ODD”) process has become increasingly important since the 2008 global financial crisis when allocators began to demand more from managers.  At the most recent EisnerAmper CFO Roundtable, industry veteran Michael Merrigan of Shadmoor Advisors LLC in New York, emphasized three key traits managers should exhibit to enhance their chances of successfully passing the ODD process. Further, he pointed out some common barriers that deter them from securing allocations.  And finally, he discussed the expectations for emerging managers vs. established managers when navigating the ODD process.

Here were a few things he mentioned:

Three ODD Traits Managers Must Portray

  1. Transparency: Fund managers should have substantial information on their firm readily available to investors which may include, but not be limited to: fund offering documents, organizational chart, completed due diligence questionnaire, trade flow, flow chart of cash movements amongst various parties, valuation policy, compliance manual, etc.
  2. Know the Facts of Your Organization: A fund’s CFO or COO in particular is required to know all the facts of their firm. For example, they should be prepared to answer questions on employee turnover, details regarding products that have closed, and/or service provider start dates and/or termination dates, along with firm milestones. 
  3. Leveraging Service Providers:  When selecting their service providers, managers should be strategic and pick ones that are a best fit based on technical expertise, experience in their respective investment strategy and ability to service them at launch and as their business grows.

Barriers to Passing the ODD Process: 

  • Managers tend to fail operational due diligence reviews generally not due to a single glaring issue, but rather from a cumulative number of smaller issues that, in aggregate, cause concern for the allocator.

Emerging Managers vs. Established Managers

  • Emerging managers often have less resources than established funds due to lower AUM.  That said, emerging managers have to be more budget-conscious about their “break-even AUM,” and they should have a defined roadmap in place to rationalize where they are now with headcount, systems, service providers, office space, etc. and how that plan would evolve as they achieve larger AUM levels.  ODD professionals and investors can do a “back of the envelope” calculation of revenues vs. expenses and determine if the business is profitable.  ODD practitioners tend to be more conscious of business risk with emerging managers than more mature managers

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Elana Margulies-Snyderman

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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