5 Ways to Use Data to Improve Your Due Diligence Strategy

Blog post Team CENTRL 2022-01-28

How can investors obtain an upper hand over their competitors, make more intelligent buying decisions, and expedite the value-creation pipeline for investments?

The answer resides in Operational Due Diligence (ODD), along with the advanced data analytics skills to evaluate target companies and alternative investments.

Today’s emerging technology leverages automation to enhance intelligent data processing and provides deeper insights to assist investors in the evaluation of potential alternative investments.

By optimally structuring the data you obtain on potential investments, you can make significant progress in improving the company’s overall investment procurement model.

But First, What is Operational Due Diligence?

Operational Due Diligence is an investor-initiated process for assessing the operational infrastructure of investment managers and funds to both detect and mitigate potential operational risks associated with your investment.

Developing questionnaires, reviewing documents, conducting interviews with investment managers, and managing issues and risks are all essential aspects of ODD.

If neglected, you may find yourself burdened with unexpected liabilities and significant operational risks that weaken your rate of return, invite regulatory trouble, and can even damage your reputation.

Five Steps for Implementing Operational Due Diligence

Your due diligence process is an essential step in gathering the information needed to make an enlightened pre-investment decision. To do this, there are five core steps for due diligence.

Step 1: Reviewing Documentation

Today, most investment managers have invested time and resources in producing comprehensive documentation describing important data on both the fund and the investment manager.

This documentation may be an important tool for determining whether or not the fund is a viable investment and if it meets investors’ requirements. It can also give an early indication of the operational infrastructure in place by the investment manager to spot any early warning signs.

Among the documents that are evaluated at this stage are the following:

  • Due diligence questionnaire (DDQ)
  • Fund offering memorandum
  • Fund audited financial statements
  • Regulatory filings such as the SEC’s ADV
  • Operational policy and procedure documents
  • Marketing Presentations

Step 2: Conducting an On-Site Visit

Conducting an onsite due diligence meeting with members of the investment managers’ team is an important aspect of the due diligence procedure.

Clearly, the progress of this method has been affected significantly over the last two years owing to the worldwide pandemic. Despite this constraint, there are several aspects of the ODD process that are reviewed during this onsite visit, including but not limited to:

  • Company culture around compliance
  • Systems used to facilitate operations
  • Staff members qualifications
  • Segregation of duties
  • Review of operational procedures outlined in submitted documentation
  • Level of IT security

Step 3: Conducting a Background Check

The ODD process’s most often overlooked, but crucial, element is background checks on the company and its key executives. The following are verified and understood with a background check:

  • The educational and professional background of key personnel
  • Regulatory and legal matters of the firm, key personnel, fund
  • Potential affiliations that may present conflicts of interest
  • Negative media related to the firm, key personnel, fund

Background checks take time, resources, and training that most investors do not have in-house, which often results in them being excluded from the ODD process; nevertheless, the background check gives important information that can’t be obtained directly from the investment managers.

This is why investors often consider hiring a third-party firm that specializes in performing these types of checks to complement their own processes rather than overlook an important portion of the ODD process.

Step 4: Assessing Key Third Party Service Providers

Funds rely on a number of key service providers to provide support in maintaining operations. This may include a third-party fund administrator, as well as an auditor, prime brokers, custodians, board of directors, and so on.

Today, it is also not unusual for investment managers to outsource a number of their operational activities both to supplement their internal resources or in place of creating these resources in-house.\Outsourced compliance, CFO/COO, IT/cyber security providers, and other services may all be examples of this.

As a result, an effective ODD program also includes evaluating important service providers to ensure that they are competent and carrying out the required responsibilities for the investment manager and/or funds.

Step 5: Analysis

As you may have guessed, conducting an ODD process entails gathering a substantial amount of information about the investment manager’s operational infrastructure. But what should you do with it all?

The key to performing an ODD review is to evaluate all of the data you’ve gathered throughout the process, as well as its potential implications for your investment.

Where Does Data Fit Into ODD?

Due diligence questionnaires (DDQs) are one of the core methods for aggregating data used to evaluate a potential investment. DDQs can provide a significant amount of information that can be utilized to evaluate the operations of a potential alternative investment.

A DDQ allows ODD professionals to gain insight into an investment manager’s operations and provides a way to identify where there may be potential operational risks that could have a material impact on their investment.

There are industry-standard DDQs available, but DDQs can also be customized to include questions pertaining to the investment, and irrelevant questions can be removed.

How to Use Data Collected During Due Diligence to Improve Decision-Making

One of the most potent ways to improve due diligence success is understanding how to leverage data collected during due diligence to improve your decision-making process.

Properly leveraging data involves multiple stages: gathering, organizing, analyzing, and reporting. The following is an overview of these five stages that you can use to make better investment decisions.

Data Gathering

In the current market, the capacity to leverage the amount and variety of extensive data can provide stakeholders with a commercially competitive advantage during operational due diligence.

Thus, this step should involve collecting data from different sources as laid out in previous sections. But gathering the data is only part of the equation.

Consolidating Data

This process involves aggregating your data into a central repository for analysis. Storing important information in one location and being able to leverage a variety of data from a single access point rather than multiple, disparate locations is key.

Non-structured data makes the analysis process time-consuming and inefficient. Furthermore, low data standards make any analysis imprecise.

Structuring and streamlining data analysis will allow you to facilitate data organization and be able to more easily identify key data metrics that both identify the best investment opportunities for your company while also assessing potential risks that exist.

Analyzing Data

Once properly structured, you can review and analyze the data to extract useful insights needed to make investment decisions.

These could be calculations, comparisons, and charts that show changes over time. It also involves evaluating operational data to determine where there may be material operational risks that could have an impact on your investment.

Reporting of Data

Reports are required in a document format based on company needs or external stakeholder demands. The report generally summarizes key characteristics and suggestions based on the data analysis.

Giving a more strategic role to data analytics can help you pinpoint your company’s objectives, goals, and priorities and should be done on an ongoing basis to evaluate any changes in investment risk.

In addition to increasing accuracy in investment evaluation, it also helps to make performance management more manageable and accurate.

Identifying the right technology is critical to supporting your data sourcing and evaluation needs. Along with this, there are other areas of your ODD processes that can be improved through technology.

ODD360 Can Be Your Ally for Due Diligence

Today, with the help of modern ODD software, much of the manual tasks, paper-based data collection, and process bottlenecks can be digitized and automated.

This reduces the need for investment managers to waste time sifting through confusing documents, creating information requests, and trying to track down answers through a variety of communication channels.

ODD360 is a multi-party operational due diligence platform used by Investors and Managers to do just that.

ODD360 provides automated workflows, auto-scoring, rich analytics, and user-friendly visual reports. The platform is ideal for investors, consultants, and fund managers looking for a centralized source of truth available in real-time in the cloud.

With ODD360, you can leverage automated RFI and DDQ workflows, a centralized document, and data repository, and customizable templates and questionnaires to streamline ODD data collection and evaluation.

With ODD360, our clients have been able to increase the efficiency of their ODD workflows by up to 50% and achieve an average cost savings of 30-40%.

Book a demo today to learn more about how CENTRL and ODD360 can support your operational due diligence process.

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