How Well Do You Know Your Manager’s Service Providers?

Asset managers are spending more time and money on building out a more robust middle and back-office function than ever before. That’s partly because of regulatory changes, which make more demands of an asset manager from a compliance perspective. And it’s partly because they are realizing that this can provide a competitive advantage, helping them to differentiate themselves from their competitors and peers (as this article by Gen II Fund Services explains).

And it’s also partly because allocators / LPs are digging ever deeper into the nooks and crannies of an investment manager’s middle and back office as part of their decision-making process around an allocation.

The operational due diligence (ODD) effort of an investor was not always so intense. In years gone by, asset managers simply wanted to know that the manager had certain service providers in place – and that these providers existed. Less attention was paid to the ins and outs of the provider. Today, however, allocators / LPs want to know why a manager uses a specific service provider, what the terms of the agreements are, whether they have changed service providers, any conflicts of interest, and whether those service providers have been in the news in the past few years (in a good way or a bad way – but mostly bad).

Until recently, investors had to compile the information they wanted relating to their asset manager’s key service providers – auditors, custodians, prime brokers in the hedge fund space, and fund administrators – manually. But technology is helping them to not only maintain this data but get ahead of the curve in terms of the ODD process by analyzing the Form ADV data to help build a picture of an asset manager ahead of an ODD meeting.

Data collected by 9AT tracks more than 2,000 service providers to private fund advisers in the US. This enables an ODD person / team at a fund of funds, a pension plan, endowment, insurance company or foundation to ask better questions during the ODD meeting. They are using it to confirm that the service providers in the PPM are those on the Form ADV, and if not, asking what has changed; they can see if there has been a change in auditor over time, which many consider something of a red flag; they can ask why a smaller, newer manager may be using brand-name service providers, which are sometimes more costly, when a different provider will be sufficient; and they can even conduct their own risk analysis on service providers from a diversification point of view, in the sense that they may have too much exposure to a certain service provider if that provider is used by many of the investor’s underlying fund managers.

Portfolio analytics technology has been around for many years, allowing allocators and LPs to build a comprehensive picture of the underlying exposures of the private funds in their stable, in turn enabling their investment due diligence (IDD) function to identify areas where they have too much risk exposure, or not enough. Now, finally, technology is providing the ODD practitioners with better tools to support what is an increasingly important part of the overall due diligence effort, enabling them to not only be better at being reactive, but more importantly, be proactive.

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