Investors failing to strike right balance between investment and Ops due diligence, says Duff & Phelps
Duff & Phelps has warned that some allocators are failing to strike the correct balance between investment and operational due diligence.
“A lot of allocators are putting a fair amount of effort and time into investment due diligence. However, I am stunned at how little time is spent on operational due diligence even now,” said Brett Horton, director of forensic due diligence at Duff & Phelps in San Francisco, speaking at the Emerging Manager Forum in London.
“I see a lot of operational due diligence teams spending just two to six hours at a firm before reaching their conclusions on whether the manager is worthwhile investing in. I cannot figure out how operational due diligence teams can reach these conclusions without spending less than 75 hours at a firm. It is essential to carry out extensive and in-depth operational due diligence,” he added.
Industry experts have complained repeatedly at industry conferences that operational due diligence needs to be streamlined and undertaken in a more thoughtful manner. Jane Buchan, CEO at PAAMCO, speaking at GAIM Monaco last week, warned investors risked information overload because of the amount of data they demanded. This in turn presents a danger as investors could miss red-flags because of the sheer volume of number crunching they are expected to do.
Others highlight operational due diligence has merely become a tick-box exercise devoid of meaning, a point reiterated by Horton. “The questions are simply a tick box exercise and a lot of allocators believe operational due diligence is a one size fits all. This is extremely frustrating because investors need to differentiate the process depending on the managers they speak to,” he said.