This is surely not Bobby McFerrin’s version of the 1988 hit song. However, despite the happiness we enjoy from central banks and vaccines these days, it sums up well the essence of my recent conversation (titled: Private Markets Due Diligence in a New Era) with my host, Willett Bird of Vidrio Financial, a technology portfolio solutions provider for allocators.
As a prelude to our zoom conversation (https://youtu.be/5i4bTN2T49Q) that you could listen to at your leisure for added color, ÊMA’s last blog, “The Big Reset”, provides foundational context for our conversation. For those less inclined to revisit our lengthy essay, suffice it to say that past is no longer prologue for a new investing era facing us.
As technology redefines and revolutionizes businesses and businesses rewrite social contacts, governments world over are also responding by rewriting domestic policies and regulations for the 21st century, which remain no longer just local news but become an integral part of a global investor’s toolkit, especially in a vastly inter-connected world. Not only would domestic policies, geopolitics and technology-induced structural changes reshape global capital markets, but new actors and their inclinations together with evolving market innovations, are also recharacterizing global capital markets. Therefore, investors would be remiss to just hope for the old-normal but now more than ever before, need to evaluate all investments in a multi-dimensional framework to understand the various moving parts in an era of growing uncertainty.
In this context, private market strategies require a much higher level of multi-dimensional scrutiny given their inherent opacity. As more and more investors increase allocations to private markets to pursue longer-term growth and idiosyncratic risk premiums (for illiquidity, inefficiency, and complexity) in a world afflicted with declining organic economic growth, rising public market correlations, rich valuations and myriad external forces mentioned above, it is imperative that investors diligence private market managers and strategies with a toothcomb.
No longer can one take comfort in just brand name managers and track-records earned in a bygone era. Investors need to get down to the individual deal/transaction level to understand the source of a manager’s alpha/premium, its sustainability, and verify if consistent and adaptable processes are adopted to mine the alpha in a “responsible” way. Surrounding a manager’s investment thesis and execution, a stable business in terms of assets, team, governance, and service providers, is equally important. Last but not least, investors and managers need to be completely aligned in sharing economics and transparency.
While these important tenets of private market due diligence assume greater importance in a new investing era, conducting due diligence is both challenged and privileged in a virtual world where travel and in-person meetings are restricted, but technology is a big enabling factor, both logistically and in aiding sophisticated analysis. To overcome these challenges and adapt due diligence practices to the demands of a new era, one of the most important things based on our experience, is to build core competencies to understand geopolitics, domestic public policy and regulations, sustainable investments, operating and financial practices in asset management, specific asset class KSFs/KPIs, etc. These should equip an allocator in evaluating opportunities across the board as opposed to remaining limited in one’s traditional approach to diligencing just specific sub-asset classes (e.g. private equity, real estate, etc.) or managers. Cross-pollinating ideas with local teams of asset managers existing within an allocator’s portfolio is another practical way to gain cross-asset “local” intelligence, which is much superior to reacting to western perceptions. And of course, seeking help from external due diligence specialists is always an option when strapped for time, expertise, internal and external resources.
In this regard, ÊMA’s new virtual research service, “Virtual Intelligence” is a due diligence-enabling service that allows LPs to overcome current (and even future) travel challenges of conducting due diligence by viewing a video recording of a virtual onsite conducted by ÊMA with a manager (and its team) practicing an alternative strategy in developed and developing markets alike. This gives LPs complete insight into a manager’s investment thesis and execution as well as a good feel for the manager to qualify for further due diligence. LPs and GPs are welcome to reach out for more details.
ÊMA endeavors to recognize new forces likely to reset, reshape and redefine the global investment paradigm to research and due diligence investment strategies and specialized execution teams that can contribute toward LPs’ portfolios. While central banks and vaccines make us happy, when it comes to due diligence, especially private market strategies, ♪♪please worry, don’t be happy♪♪.
However, happy listening: https://youtu.be/5i4bTN2T49Q and stay tuned.
Kamal Suppal, CFA
Chief Investment Auditor
March 3, 2021
The above content is intended for sophisticated audiences as in institutional investors or family offices. Readers are advised that any theme or idea discussed above is not an offer to buy or sell any investment.