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EisnerAmper’s CFO Roundtable: Navigating Operational Due Diligence with Prospective Investors

Jun 26, 2015

Corbin Capital Partners director of operational due diligence Terence Brady weighs in on the importance of well thought-out processes and procedures, a properly-staffed back office, and honesty and transparency amongst fund managers

At EisnerAmper’s CFO Roundtable on June 24, Brady discussed how managers should be prepared to navigate operational due diligence (“ODD”) with prospective investors. The operational due diligence process by investors continues to evolve and become more complex. According to him, alternative investment managers must be able to demonstrate to potential allocators they have appropriate processes for the particular environment, an identifiable back-office team, and transparency, to name a few best practices.  

Here are a handful of things to consider:

-Preparation is key. The more information managers provide to investors prior to their visit, the more focused and efficient the on-site meeting will be.

-A firm’s back-office personnel need to exhibit the same level of pedigree as front-office personnel. Investors will view it as problematic if managers have highly-seasoned professionals in front-office roles and more junior-level people for the back office, therefore not putting enough perceived emphasis on the importance of the back office. Segregation of duties amongst the firm’s personnel is vital.   

-Employee background checks will be conducted by potential investors not only during the initial ODD process, but if they decide to allocate, they will also be done throughout the life of the investment, typically every other year. Allocators will inquire about managers’ employment history, education, regulatory and legal checks and credit checks. That said, managers should perform background checks on their prospective employees as part of their new hire process.-Service providers need to be competent and reputable, and further be able to demonstrate the existence, safeguarding and correct valuation of assets Investors expect managers to have a suitably qualified administrator, auditor, legal counsel and prime broker. If managers don’t have them in place, a potential investment might be vetoed. Who a manager selects for these key service roles are reflections of the manager and their commitment to be an institutional quality firm.

-Risk management is vital. Managers need a solid plan for operational risk and what is being done to mitigate such risk.

-Alternative investment managers must have a robust compliance plan in place, including a dedicated person in the role. Smaller firms who don’t have the resources to hire a compliance person can consider forming a “Compliance Committee” comprised of different people at the firm who can assist in the compliance effort. They should meet regularly to ensure progress. The risk of a split role such as a CFO/COO which is tasked with compliance duties on top of their normal workload is questionable since investors might question the amount of time they are truly devoting to the firm’s compliance function.

-Follow through is key. If managers promise investors certain things as their AUM grows, whether it is hiring new people or incorporating new systems, they should deliver on those promises since potential investors do come back and follow up.

In the end, transparency is key throughout the entire phase of the ODD process. Managers need to have well-thought out processes and should be open to suggestions.

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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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