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It is key to operate in a commercial manner when dealing with LPs, and here the word commercial means “industry standard and arm’s length”. While ODD is by no means standardized in 2018, the market talks to one another at conferences and in business settings, so we understand what the due diligence expectations are across the market and the world. The balancing act on both sides is reconciling industry standard to arm’s length, and making judgments on what is necessary versus ancillary. Here are some general guidelines:
In terms of documentation, managers should provide the requested documents, unless they are widely considered proprietary or private. For example, managers are willing to provide OMs, articles of association, certificates of incorporation, fund audits, DDQs/FAQs, FORM ADV, and marketing material. They largely never provide manager financials, manager operating agreements, or manager tax returns (unless a stake in the management company is being sold). When asked, they often provide policy and procedure documents (e.g. valuation, cyber security, and business continuity plans), but typically will not provide compliance and operations manuals. Today however, it is best practice to provide all of these documents electronically to the LP or its consultant in advance of a due diligence meeting. Having said this, many managers historically have not provided the latter two manuals except during onsite visits, but more and more institutional managers today are now providing these documents electronically so sufficient levels of due diligence can be performed to assess a firm’s compliance policies and internal control environment. In terms of verbal assertions, during manager interviews, it is important to answer questions truthfully or opt not to answer the question at all. If you opt not to answer a question, it is best to understand the consequences of not answering the question, and consult industry experts to see if the question at hand is in fact normal and industry standard. For example, unanswered questions related to regulatory exams, regulatory violations, and litigation would generally be considered a flag and an open item that should be addressed by an LP prior to making an investment in a fund. In terms of service provider confirmations, managers generally do not limit the types of questions an LP will ask a service provider (e.g. fund administrator), and if they try to, it will generally be considered a flag, and added to a list of considerations that could determine a positive or negative opinion of the manager.