2022 Investment management due diligence trends for the year ahead
By Liron Mandelbaum, COO of Dasseti, Inc.
After a positive performance in 2021, many industry commentators believe that it’s likely the global investment management sector will experience economic uncertainty and inflation in 2022.
There are some common themes emerging that will shape the year ahead, many of which can be supported by a strong due diligence strategy.
- ESG, diversity and sustainability
Private Equity International LP Perspectives 2022 reports an increase from 38% to 57% investors who believe ESG will be a key issue in 2022 . “Greenwashing” and superficial commitments will no longer be enough and regulators, rating agencies and institutional investors are calling for a common vocabulary and ratings to improve transparency.
Janus Henderson believes 2022 is the year for substantiating ESG claims with proof and evidence of progress. Important questions such as does the manager have dedicated ESG investment teams, an ESG corporate statement and investing principles, clearly articulated strategy objectives, a relevant track record and oversight of ESG initiatives, can assist investors in rating their managers.
BNP Paribas in its investment outlook states that its “key investment themes have a sustainable angle, energy transition and environmental sustainability”.
Dasseti's ESG and diversity monitoring module allows investors to assess managers’ relevant data points, providing the assurance and metrics they need to form a clear picture of the portfolio.
Private Equity International’s LP Perspectives 2022 states that 64% of LP’s believe fund due diligence is the activity that takes the greatest amount of time, closely followed by portfolio monitoring.
Because of this, digital solutions that transform operations, including by speeding up the due diligence process, will be highly prized. We believe investment management firms across the sector will look for digital services that use advanced technologies like natural language processing, AI and machine learning to automate, accelerate and streamline manual process. By transforming in this way, investment management firms will become more competitive, facilitate collaboration between teams and third parties, enhance productivity and reduce the human error associated with manual processes.
- Private equity manager differentiation
Due diligence will be instrumental for investors, particularly in the private equity sector, which has performed very strongly through the past few years, in differentiating between GPs.
With such strong track records across the sector, it may be necessary to think outside the box and evaluate the depth and strength of the GP team, how well niche offerings could fit into investor portfolios, how strong the GP’s succession planning has been or how financially strong the balance sheet is. Qualitative due diligence will bolster quantitative research and provide the extra differentiation LPs are seeking when planning allocations.
- Single source of truth
Professionals across the investment management sector, whether they are institutional investors, consultants, managers or third-party service providers, are all seeking the holy grail of data, the single source of truth. With data coming in from multiple sources, whether that is purchased research, own research, one to one communication data, DDQ data or in-depth bespoke data gathering, the single source of truth brings the sources together in a single, accessible location. A single source of truth allows investment management professionals to either drive better decision making, faster and with no ambiguity, or allows firms to respond to DDQs and RFPs in a timely fashion, with the very latest and greatest information available.
Dasseti is forever seeking the single source of truth for clients, allowing them to access the right information, at the right time to pre-empt or respond to requests.
- Regulation continues to dominate the sector
Global regulators are putting their weight behind trend #1 above – ESG, diversity and sustainability – with plans to introduce new sustainability disclosure requirements from the SEC and the EU’s development of the Sustainable Finance Disclosure Regulation. The PRI is adding human rights to its reporting framework and G20 leaders welcomed the work of the International Finance Reporting Standards Foundation and new International Sustainability Standards Board.
In addition, regulators are pressing the need for transparency, none more so than in the private markets, where the SEC in particular has identified a need for greater levels of disclosure as institutional allocations in this area increase. As more and more mutual funds and pension funds invest in private markets, using citizens’ savings and retirement funds, the potential risks brought about by the lack of transparency increase. Allocators can mitigate some of these risks with greater scrutiny via detailed due diligence, gathering qualitative data for depth and context.
Around the globe, regulators have been focused on cybersecurity defences and resilience after huge increases in hacks and breaches during the pandemic. Operational resilience and cybersecurity now feature heavily in every ODD investigation. A platform that provides guidance and best practice in these areas will be essential for investors, consultants and managers moving forwards.
Digitize your due diligence in 2022
There is a lot for the sector to think about in 2022. We believe that a robust digital platform for managing due diligence and research data will be essential this year. The changing market conditions coupled with our growing team of specialists, additional round of funding and a rapidly growing client base, mean that Dasseti is one to watch in 2022. Reach out to see a demo of our digital platform.