Operational Due Diligence (alternative Investments) - Choosing An ODD Provider

Choosing An ODD Provider

Investors may perform operational due diligence themselves or they may work with consultants to either outsource operational due diligence reviews entirely, or to compliment their own internal efforts. The general consenses is that the forms of ODD which provide greatest benefit for investors are those characterised by:

• not relying on a checklist approach so that the investigation is bespoke for the investor’s specific interests and tailored to the target alternative investment fund;

• offering multi-disciplinary solutions to legal, financial and accounting, tax, regulatory and compliance, risk management, corporate governance and internal control concerns (as opposed to skills in one particular area such as accounting);

• the involvement of a team with the breadth and depth of experience to clearly and succinctly identify “red flags” and propose practical recommendations for risk mitigation and monitoring;

• transparency of detailed findings to the end investor – note that managers of funds of alternative investment funds (e.g. fund of hedge funds managers) typically do not provide full transparency to their investors of the findings of their ODD, with investors simply becoming aware, after the fact, that an investment in an “underlying” fund has been made or that a divestment has occurred;

• succinct written responsibilities and scope, as well as clear legal liability of those performing the ODD for the quality of their work;

• individuals and organizations involved in the performance of the ODD being subject to professional requirements on ethics, independence, minimum levels of professional indemnity insurance and Continuing Professional Development of an appropriate professional body or institute, with underlying work performed as part of the ODD subject to oversight and Quality Assurance reviews by that body or institute.

• being paid for directly by the end user (i.e., the investor) rather than by the alternative investment fund or its manager (due to the conflict of interest created if the fund or its manager is the “client”) or bundled as part of a wider service (for example as is the case with a fund of funds).