In our latest Coffee and a Conversation, Vidrio's Willett Bird met with Kamal Suppal, Chief Investment Auditor of the Boston-based, Emerging Markets Alternatives. The two discussed the nuances of conducting due diligence on private market funds/managers, with a focus on the current virtual environment and best practices that allocators and LPs should consider during their research processes. Following is a summary of the conversation and a link to stream the audio recording.
Due Diligence of Private Market Fund Managers - Nuances and Trends
In an era marked with many moving parts and growing uncertainty, our guest speaker, Kamal Suppal stressed, "past in no longer prologue,” and “ we are in an epochal phase in our investing careers," where asset allocators need to look at every investment through a new lens and consider investment opportunities (and risks) via a more multi-dimensional framework. Kamal emphasized that lower global economic growth, rich valuations and rising correlations in public markets creates the need to push boundaries and seek more idiosyncratic returns within the Private Markets.
However, it is first important to understand the nuances of researching private market funds and managers during the due diligence process, as outlined here:
Adaptation of P/E Due Diligence to Remote/Virtual Environments
It came as no surprise that our audience flagged manager assessment and team dynamics – getting a personal feel for a manager – as the primary challenge of conducting due diligence in the current remote environment. We are more than a year into the Pandemic, and it's likely fair to say that “Zoom Diligence,” as Vidrio has coined it, is here to stay for the long run, along with other interesting trends as we enter year two of the virtual world.
As Kamal commented, while there is certainly screen fatigue all around, the flipside is that businesses are seeing strong efficiencies from virtual capabilities, including an increase in productivity, more organized and agile teams, and of course the elimination of redundant travel and related expenses.
Further, asset owners are now being exposed to interesting new investment opportunities. Some specific examples outlined by Kamal include SaaS/Mobility ventures in emerging markets such as India and Southeast Asia to middle market lending in Asia where investors can still enjoy premiums with investments into data centers, e-commerce facilities in real estate, digital infrastructure, etc.
Efficiencies and opportunities aside, investors are still not willing to pull the trigger on certain allocation decisions with managers that they’ve not met in person. So how can allocators adapt and get comfortable with remote due diligence to leverage meaningful opportunities within their portfolios? “Adapt or perish,” says Kamal.
Enabling P/E Due Diligence for Allocators and LPs
As Kamal reinforces, we will be in a virtual environment for the long term and adaptation is the name of the game. Allocators must be willing to adapt a change in mindset and think outside the box to address the current situation.
To sum up all the above: Due diligence in today’s environment is a journey, not an event – it is imperative that allocators and LPs can adapt to the new investing era with a multi-dimensional approach.
Facilitating Private Markets Due Diligence
Over half our audience flagged customizable technologies and tools as a solution that everyone could benefit from. While we at Vidrio are of course pleased to see this corroborated, we are not surprised. Over the last 12 months, we have increasingly heard from our own clients and other allocators and LPs that their ability to conduct top-down analyses and see a complete picture of exposures, transactions, deals, etc. is more crucial than ever before – across all asset classes, both private and public.
In addition to the benefits of SaaS, any asset owner strapped for time and resources can still conduct a very objective assessment of the investment opportunities that they are researching. There is also great benefit to be had from external Investment Audits – an innovative service that Kamal launched through his firm, Emerging Markets Alternatives. More recently, the firm has launched a due diligence enabling service, Virtual Intelligence, which overcomes current (and even future) travel challenges of conducting due diligence by sharing with investors, a video recording of a virtual onsite with a manager, offering complete insight into a manager’s investment thesis and execution that investors can leverage to qualify a manager for further due diligence. The concept of Investment Audits is partly inspired by Kamal’s drive to democratize research and due diligence for investors, and inspired by the EU’s MiFID II rules, which have created a whole new industry in independent research and could potentially find its way to the US in due course. Similar to a financial audit, an investment audit enables allocators and LPs who might otherwise be strapped for time and resources to gain a 360 degree independent evaluation of an alternative strategy/manager. Read more about Emerging Markets Alternatives and their unique approach to independent investment audits.
Audience Questions
Following is a summary of questions that were posed to Kamal at the close of the conversation. Please contact ksuppal@emaltsauditor.com or willett.bird@vidrio.com if you’d like to follow up on any of the points discussed in the audio recording or summarized here in this blog post.
Q1: How do you ensure that virtual onsite is not a forum for a manager pitch?
A1:We do a lot of pre-work before doing a virtual onsite. Post our initial interview of the manager , weget into their data room, review all available documentation, and then seek customized responses and transaction level data All that pre-work then culminates intothe virtual due diligence meeting where all that has been learned can be verified, clarified and walked-through. Iwithout any scope for the manager to deliver a product pitch.
Q2: What does risk management look like in long duration assets during what Kamal called the “apocryphal” phase?
A2: There are two aspects:
To sum it all up: Time duration and all these external factors could ultimately influence the opportunity.
Q3: How do you verify authenticity of private market deals from a manager’s track record?
A3: What Kamal and his team do on behalf of their clients, is not just look at fund level information, but really, “rip apart” all the funds, extract individual transactions and collate the information that follows the entire deal life-cycle of every deal from start to finish. They then identify sample transactions based on materiality to a manager’s performance and manager’s business, and seek (virtual) face time with the manager’s counterparties, e.g., borrower/ investee company, to conduct one-on-one closed-door sessions that not only establish authenticity of deals and parties, but also to understand why and how they chose to transact with that manager vs. other choices. This also gives further insights into the manager’s execution from the other side of the aisle.
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While the above summary hones in specifically on the discussion points related to private markets due diligence, Kamal started this conversation with a broad illustration of forces that are reshaping a new investing era with implications for global capital markets. You can listen to the complete audio recording via the link below.
Intro - Geopolitical and other factors impacting the global investment strategies
09:45 - The Case for Private Markets
13:30 - Due Diligence of Private Market Fund Managers - Nuances and Trends
20:45 - Adaptation of P/E Due Diligence to Remote/Virtual Environments
31:45 - Enabling P/E Due Diligence for Allocators and LPs
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About our Speakers
Kamal Suppal, CFA is Chief Investment Auditor of the Boston-based, Emerging Markets Alternatives, which specializes in independent research and due diligence of alternative strategies executed by emerging managers in developed and emerging markets. His research - with a bias toward private market strategies - is for the benefit of global institutional investors.
Willett Bird, CFA is Director of Business Development at Vidrio Financial - a complete front- to middle-office investment management solution with integrated data services, sophisticated analytics and business controls for institutional allocators and LPs across the globe. Vidrio’s data aggregation and analytics help solve complex fund management problems, improve operational efficiency, and reduce risk for multi-asset-class portfolio investors. Our clients are the world’s premier allocators to external managers.