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How fund due diligence has changed during Covid-19

By Joanna Kirby, Managing Director, Time Partners – Private equity relies heavily on manager skill (alpha) with a large divergence between the strongest and weakest performers in a cohort. Studies have shown that it is possible for some investors to effectively navigate this disparate market and consistently add value, through careful fund selection. Robust due diligence processes, both investment and operational, are a critical part of successful fund/manager selection, but how has this changed during the pandemic?

The most obvious impact is from travel restrictions preventing on-site, in-person due diligence meetings. Investors are aware that reviewing track records and strategy can only provide a certain amount of comfort. A large part of the investment consideration is around the people, team dynamics and culture. There is a lot that can be gained from seeing how a team interacts with each other, when visiting a private equity firm’s office – it is often the smaller clues or comments before and after the formal meeting that provide the most insight. Forming a view over a conference call with the team in multiple locations is hard: there is a lack of “vibe” and nuance that can only be gleaned when in-person.

Due to Covid, this important piece of the due diligence evaluation has not been available and at best is likely to be limited in the near-term. During these times, the tendency might be to focus on GPs already known to the investor, where the investor has been able to meet the team and assess their dynamics, culture and understand any leadership transition – in our opinion, key drivers of success. To some extent, there has been a “flight to familiarity” as investors have been working through processes that started before the pandemic or focus on re-ups.

To mitigate restricted travel, we have drawn more from our own industry network, as well as our global network of trusted advisers and partners, with their local presence and additional insights. On the record and (often most telling) off the record references with those in our network, and beyond, who have invested with or have carried out due diligence on the firm in question are invaluable. Conversations with operating partners and investee company management remain important too. We have expanded our referencing, utilising these conversations to support our research and diligence, providing confidence absent face-to-face interaction.

The crisis has also put a spot light on ongoing due diligence. GPs have had to manage different stakeholders, both internally across their own staff and operating partners, and externally with their portfolio companies and Limited Partners. Communication between GPs and investors has increased as a result of the pandemic, with more regular updates, increased volume of information provided in data rooms and virtual due diligence sessions or webinars. This additional insight has undoubtedly helped our investment thought process, with more “desk-top” due diligence available. However, could this cause investors to shy away from newer, emerging groups, or strategies, where there is less track record and desktop data available?

Coronavirus has challenged many business models, so it is critical that private equity sponsors are adding value wherever they can to assist management, in terms of operations, financing, people and markets. We value a proactive approach and like to see engaged, thoughtful sponsors who share our values around corporate responsibility and purpose. How a PE firm has acted over 2020 gives a good insight into culture and modi operandi. We are strong advocates for studying long-term thematics and the pandemic has reconfirmed its importance. Many themes are accelerating and dovetail well with ESG assessment when underwriting – something that is increasingly important.

Overall, due diligence in the time of Coronavirus has had to be more rigorous, yet there are limitations that impact decision making. While in-person meetings may be limited, the insight into the team and firm culture remain important investment considerations. Rather than simply lean towards known managers and strategies, investors could use the current situation to enhance their processes.

Those who have a long standing, global network have an advantage in terms of their local presence and the insights and ability to react that this brings. For those investors without their own global capabilities, partnering with a trusted adviser could be beneficial, to deepen their due diligence processes, build new GP relationships, being cautious yet open to new opportunities.

Time Partners is an investment and strategic advisory firm, focusing on private markets globally. The firm supports investors, families and entrepreneurs invest across the private capital landscape, aligning their investment strategy with their goals and beliefs. Headquartered in London, Time Partners has a network of international partners in Los Angeles, Houston, New York, Hamburg, Athens, Cape Town, Singapore, Tokyo and New Zealand.

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