PRISM INSIGHTS #110
Today’s ODD landscape still has some of the age old road blocks (e.g. single signature wire controls). However, there are “more”…..
Around 15% of all institutional managers fail institutional ODD. Often the same problems arise, however the bar keeps moving, and the more complex the situation the manager creates around them, the more questions arise. Showing clearly operational and structural risk is key to passing institutional ODD reviews. Transparency and communication are key.
The top 10 reasons why managers do not pass an operational due diligence review are the following:Failure to secure assets with 2 authorized signers in all cases.
Failure to reconcile trades, cash, and positions daily.
Failure to engage independent recognized pricing providers on 100% of the portfolio on valuation dates.
Failure to register with regulators timely.
Failure to disclose material facts to investors.
Failure to pass an SEC exam with limited findings.
Failure to document your firm’s policies and procedures around IT, information security, valuation, compliance, and disaster recovery.
Failure to have a business plan.
Failure to hire qualified staff to support the money that clients invest in your products.
Failure to tell the truth during the due diligence interviews.This list is a solid conventional guideline for managers to work through the ODD reviews.What else can trigger a failed ODD assessment? While the hedge fund and private equity fund industries have thrived in an entrepreneurial environment, this doesn’t mean that a culture of putting the client first and building a sufficient operational infrastructure should not shine in your presentation to investors. When ODD professionals request information, and managers omit certain information in the list, it can prove valuable if you explain why you are opting not to provide the information. Simply omitting the document or providing less data than requested, is showing limited transparency, thereby triggering either additional or less work on part of the ODD professional. On another note, complex operations such as multiple offices, remote employees, multiple regulators, part time employees, and multiple businesses create a question as to whether such a structure is best for the investor or best for the principals of the manager. Firms with a history of litigation often have to go through hurdles to get approved by institutional investors and other fiduciaries. Firms with a history of regulatory violations are very rare, unless they are a long standing global financial institution, and even in these cases, the violations need to be assessed for materiality, relevance, and affiliation with the products under review. Privately owned firms, which are the most commonly seen managers in our industry, have very few instances of regulatory violations. Having said this, these too should be evaluated. How long since the last violation, what was the violation, what were the corrective actions; and ultimately as a fiduciary investor are you willing to take this risk for one allocation? In summary, asset management businesses are always changing and so are the ODD findings, but clarity and transparency help.