The due diligence deep dive is getting deeper

Operating remotely is encouraging investors to play it safe by backing brand-name managers, but niche managers may yet fight back with more sophisticated pitches.

Our PDI 50 ranking of the most successful fundraisers in private debt consistently shows, year after year, the growing gap between the fund manager heavyweights and the rest. The brand names are vacuuming up vast amounts of dollars and euros, while the rest compete for the scraps from the investor table. That much was becoming clear several years ago, and it’s even clearer now.

Moreover, it’s a trend that the global health crisis has done much to accentuate. For many limited partners, the level of due diligence needed to get comfortable with niche propositions – perhaps an unorthodox strategy or a country with above-average risk – is so great that, without in-person meetings, it just doesn’t seem possible. Occasional video calls don’t cut the mustard when it feels like you’re going out on a limb.

In this kind of environment, you would expect some innovative solutions to be developed. Last week, we learned of a new product, Virtual Intelligence, being launched by Emerging Markets Alternatives, a self-styled investment auditor based in Boston, US. EMA works with many niche emerging market managers, doing deep dives on such firms and then helping the most credible among them reach out to LPs.

Virtual Intelligence aims to offer a more sophisticated presentation than a Zoom call – or even multiple Zoom calls – could offer. According to EMA’s chief investment auditor, Kamal Suppal, these include: a package of video recordings, including conversations with managers to draw out the personality of team members and their value proposition; a deep dive into the investment thesis; a ‘virtual onsite’, where investors can see managers going about their day-to-day business; a full report of EMA’s findings about the manager; and ‘town halls’ where managers respond to investor questions.

In EMA’s view, LPs still need diversification as much as they ever did, even if this is not hinted at by their current, conservative allocation choices. The firm also believes that the smaller managers it represents may often be better positioned than their larger, global counterparts to exploit specific strategic or geographic pockets of opportunity.

In the fundraising world of the future, remote due diligence may well retain a role even when in-person and on-site meetings are once again possible. Thus far, video calls have been invaluable in keeping the wheels of capital allocation turning. However, it’s no surprise that, rather than settling for what was effectively a temporary fix in the face of an emergency, some are now experimenting with more sophisticated approaches.

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