Due Diligence Matters - August 2024
perfORM is an award-winning, international (UK, Switzerland, USA (and coming soon, Hong Kong)) and standalone Operational Due Diligence solutions provider with 100+ years of collective ODD experience. Over 250 operational due diligence reviews have been completed since the start of 2023.
Whilst August is often considered a quieter time for business, we remain fully engaged in supporting our clients with On-Demand ODD, be it new / initial reviews, monitoring or otherwise. In addition, we will soon be announcing further Investment Manager ODD Report Solution clients.
Please contact us if you would like to discuss our services, or to receive sample ODD Reports.
Missed the last e-bulletin? Click here for the July 2024 edition.
The Importance of Third Party Verification
One of the key tenets adhered to by perfORM is that the controls that an investment manager (“IM”) claims to have in place to mitigate key operational risks should be verified with an appropriate third party wherever possible. Thus, we always seek to confirm independently that, for example, the fund’s auditor, as listed in the PPM, is indeed the auditor, or that an outsourced IT/cybersecurity provider is actually providing the services stipulated by the IM.
The key service provider in this respect is the administrator. Without its co-operation it is challenging to obtain comfort that an IM is operating as it claims with respect to its fund-related responsibilities, and that the fund’s performance and assets have been accurately reported. While administrators are often happy to share their DDQ, marketing doc and/or SOC 1, these do not refer specifically to the key aspects of the fund under review, i.e. NAV calculation, valuation and wire transfers. Asking the right, fund-specific, questions is important.
Verification works!
Recently, for example, upon asking the administrator of an equity long/short fund to confirm what proportion of the fund’s NAV it had been able to value independently at the most recent NAV date, we were surprised to be advised by the administrator that the proportion was less than one third. Given the stated strategy, we had expected 100% of the NAV to be independently valued. The much lower amount was due to the fact that the IM had entered into material unlisted holdings, which the valuation committee was valuing at three times their purchase price. These positions were not reflected in the fund’s literature. An audit had not been completed since the positions had been entered into, so they could not be identified through a review of the financial statements. The positions were not side pocketed, so our client could have been exposed to an unexpectedly illiquid portfolio, had it invested in the fund. Due to these holdings, we did not consider the fund’s redemption terms to be aligned with the achievable liquidity of the portfolio, which could have led to our client having difficulty redeeming.
Another example is IMs with lightly resourced compliance functions claiming that they are supported by well-known compliance consultants, where in fact the consultant has only been engaged on a one-off basis at firm or fund launch. This increases a client’s reputational risk, in the event of association with an IM which commits a regulatory breach.
While obtaining third party verification takes time and effort, without it we are solely reliant on what the IM tells us which, as shown above, can present significant risk to our clients. Indeed, if we cannot obtain, or are prevented from obtaining, independent confirmation, we classify this as a significant risk in our final report. Thankfully, in the vast majority of cases, IMs and fund service providers also understand the importance of this process.
ODD Report Solution
Our ODD Report Solution is not just another tick in a box, it is an innovative approach to operational due diligence. A pragmatic solution for Investment Managers and Service Providers which engage us to complete an ODD review.
Investment Manager: Eltican Asset Management SAS – please contact here to request access to our March 2024 dated ODD Report
Digital Asset Service Provider: Copper Technologies (Switzerland) AG – please contact here to request access to our April 2024 dated ODD Report
Investment Manager: Hyperion Decimus, LLC – please contact here to request access to our March 2024 dated ODD Report
Investment Manager: Coral Cove Capital Ltd – please contact here to request access to our January 2024 dated ODD Report
Investment Manager: MARK Capital Management LP – please contact here to request access to our November 2023 dated ODD Report
Investment Manager: Wincent Capital Management Limited – please contact here to request access to our September 2023 dated ODD Report
Investment Manager: Hivemind Capital Partners UK LLP – please contact here to request access to our September 2023 dated ODD Report