Fund Managers: Are you prepared for investor due diligence in 2023?

Dasseti partnered with AIMA to offer manager members a sneak preview of their interesting research findings gleaned from over 1,000 questionnaires and answers that have passed through the Dasseti platforms since 2019.

Dasseti partnered with AIMA to offer manager members a sneak preview of their interesting research findings, gleaned from analyzing over 1,000 questionnaires and answers that have passed through the Dasseti platforms.


James Hopegood, Director, Asset Management Regulation. AIMA

Liron Mandelbaum, Chief Operating Officer, Dasseti

Fiona Sherwood, Chief Marketing Officer, Dasseti

Introductions and Welcome

James Hopegood
Hello, everybody, and welcome to this Dasseti and AIMA webinar, looking at investment due diligence. Today, we will be looking at how you prepare yourselves for the year ahead, making sure that you benchmark against your peers, why transparency matters and making sure that you are aligned with your investors. And we'll be doing this using research gathered by Dasseti, more of which very shortly. My name is James Cook and I'm director of asset management for AIMA. I'm joined today by Liron Mandelbaum and Fiona Sherwood from Dasseti who will now introduce themselves briefly to you.

Fiona Sherwood  
Hi everyone, I'm Fiona Sherwood, Chief Marketing Officer for Dasseti, formerly Diligend who you may have heard of. And it's good to have you with us. 

Liron Mandelbaum  
Hello, everyone. I'm Liron Mandelbaum, COO of Dasseti. And thanks for joining us.

James Hopegood
Not everybody knows Dasseti, though you've been around a while. Would you like to just briefly talk us through the new name, please? 

Dasseti was Diligend, but why the name change?

Liron Mandelbaum  
Absolutely. So, formerly we were Diligend, and we started off in the industry about three to four years ago. Dasseti is a new name that shows the evolution of the industry away from just data collection on a due diligence side, and more into analysis, because 'Dasseti' means to 'reveal' or to 'show'. So that's what we do for our clients. So, you know, the precursor for the name change was a major investment by NASDAQ, which allows us to do and deliver more technologies to the space.  

We're a global business. We work with allocators, and consultants sending out requests for information hence we have the data that Fiona will share with you, and the insights that we will deliver.  On the other side we work with managers, GPS in the traditional and alternative space. We are sitting in the middle there, we get to see both sides, we have tools for both sides, we see the pain and we see where the industry is moving. And that's really due diligence and data capture on a very high level.

The challenges for both sides is a lot of paperwork. And when you're an allocator asking more questions, that's painful for the IR teams answering them. But it also means that the consultants and allocators now need to review more data points.  So both sides have these challenges. And technology like ours helps automate these processes.

Using tech like ours can reveal the insight, the creation of benchmarks for for the allocators to know when something is worthy of being a risk or something that's just a risk profile of an investment.  

For managers, it's important to have the ability to respond and scale and be more efficient. So you can focus on raising money, you can focus on running the business and investing, versus answering 400 questions at a clip.  So that's the two key challenges that we have.

If I look now at the product, we break our product into two, whether you're collecting or responding. This doesn't just mean allocators and consultants. This can mean managers collecting data from their vendors and third parties. Collecting environmental data is required in Europe, right. We handle that.  From automating the way you collect it, to cleaning the data, to visualising it, to getting the insight and creating the reporting you need for all the stakeholders. On the response side, think of us as an RFP tool designed just for financial services, just for our industry, because there's unique needs for our industry. From that perspective, we get to see a lot of different processes for IR teams. 

What should be top of mind for managers when thinking about due diligence requests?

James Hopegood
Thank you. When firms are thinking about due diligence requirements and duties, what should they be thinking? What do they need to think about and have in place, ahead of getting in touch with you guys?

Liron Mandelbaum  
Essentially, the requirement is to have is an understanding of the need and how much of the process could benefit from automation. From recent research we've found that roughly 80% of all questions from all allocators are substantially the same, but each allocator consultant will ask it slightly differently. So it's the same questions being repeated. That is where automation could come in. With technology you could digitise this process, giving your team more time to carry out other components of the business like fundraising or dealing with more nuanced requests.

Dasseti's research project spanned over 200,000 questions asked by allocators and consultants between 2019 and 2022

James Hopegood
Thank you very much. Dasseti has been making a great deal of use of its current and historical data to look in more detail at how the work on due diligence has been evolving. So Fiona, can you tell us a bit about the the data sets you've been able to look at and how deep you've been able to go?

Fiona Sherwood  
Yes, so last year we realised that we have sight of hundreds of thousands of questionnaires passing through our platform. Plus we're starting to be asked for advice on the best way to phrase things or what questions to ask. So we decided to delve into that dataset and just have a look and see if there's anything completely anonymized, and if there's anything we could share with the industry to help them either improve their responses or make better decisions about what to ask for.  We looked at over 200,000 questions spread across more than 500 questionnaires, that go out to 1,100 globally distributed managers. We tried to narrow that down to alternative asset managers, such as hedge funds, private equity firms, real estate firms. And as you can imagine, it was a massive piece of work. It was like looking for a needle in a haystack to start with! However, as we started to look more and more into what questions were being asked  back in 2019-2020, and what's being asked today, we did notice a few patterns emerging, which we thought might be useful to share with you.  

Finding 1: Questionnaires are getting longer - 20% longer

Fiona Sherwood
Something that soon came to light was that questionnaires are getting longer, which may not surprise many of you who spend your time answering them! We found that between 2020 and 2022, there was around a 20% increase in length of questionnaires. We also realised that the questions were becoming less qualitative and more quantitative, so allocators are asking more yes/no questions along with asking for more supporting evidence. 

James Hopegood
So, what lessons can firms take from this? How can firms prepare themselves, and what kind of preparative work do firms need to do?

But why?

Allocators and consultants are moving towards quantitative questions in a bid to do more benchmarking

Liron Mandelbaum  
So, the increase in the length of the questionnaire doesn't mean that there's necessarily new topics, but they're asking things in a more quantitative way, and also a more mechanical way, with more yeses and noes and more multiple choice. And the driver behind that is to create benchmarking on their side. With open ended questions allocators can't really extract the particular component, but if they break it down into multiple choice then they can. So that suggests that a potential allocator or consultant is starting to benchmark something on their side: if you've seen it more open ended previously, and now they're switching to more discrete choices. But the implications are that when you see a question that says yes or no, it almost always means there's something coming behind it. Right? So be prepared, if you're on the IR side, and it's asking you for example, are you a UN PRI signatory, it's not going to stop at a yes or no there. So if you go to your subject matter expert, and confirmed that you are in the new year, you  now realise that they're will probably be some follow on questions. And that's where the questionnaire gets bigger. Select Yes and see if anything else pops up. You've got to assume that the questionnaires are going to go deeper, just confirming something is not going to cut it any more. And so as you're preparing your data and thinking about what kind of data you should make easily accessible to your team, it's going to go a little deeper than confirming something as a yes or no, they're going to want to see a process. I think that's coming from the fact that allocators are seeing deeper answers from some managers and GPS. Because of that, they're using that to formulate questions and say, "Wow, can everybody provide me with this level of depth?" Somebody somewhere is providing data that's driving allocators to ask deeper questions. This is what we've noticed. And of course, regulation will also add to that. 

Regulations could be driving more questions too

James Hopegood
Very helpful, indeed. Just one final thought about your your reflections on this? You mentioned regulatory drivers. So I'm recently arrived from the Financial Conduct Authority in the UK, where they're putting in place a whole new raft of systems. So is the drive because the industry wants more information? 

Liron Mandelbaum  
Yeah, that's kind of leading into our next insight. So what do consultants and allocators really want? And then what are they forced to want? By the regulators? They definitely have their own desires. And we touch a little bit of it in this point here, this concept of benchmarking. Even small allocators, if they have enough funds, they can they can start to build their own internal benchmarking. What's appropriate and what's not in terms of particular third parties that managers should be using and then the regulation part is the driver of ebbs and flows, which we'll cover next.

James Hopegood
Thank you very much. Fiona, would you like to take us through the next model findings?

Finding 2: Due diligence focus ebbs and flows

Fiona Sherwood  
So when we mapped out how many questionnaires pass through the platform at which times, and again, this won't come as any surprise to you, we found that find due diligence focus comes in ebbs and flows. So, at various points in the year, there are high volumes of questionnaires being asked and answered, quarterly, annually, and then there are some anomalies. The reason for that, we think is if there's some negative press around a high profile scandal or failure, or some news around due diligence that draws everyone to it, or other kind of global events that might force allocators to ask specific questions. But we just thought that was interesting, because platforms like ours can actually help smooth those peaks and troughs out and mean that you can deliver consistently high results. 

But why?

Regulations, high profile scandals, global events, or simply peak times for regular monitoring

Liron Mandelbaum  
Going back to James's prior question about being driven by new regulation, in the first phase, something comes out a new regulation, or some advisory note from the FCA or the SEC. And so the first knee jerk reaction is we need to collect this data or flag yes or no. Are these checks being done? So you'll see that typically is a yes or no? And then you know, always these Yes. And those come with comment boxes. And as managers and GPs answer those and give more elaborate comments, those evolve into more detailed questions. It's a driver of that 20% increase in total number of questions.

So the regulators are forcing a knee jerk reaction. But then the allocators who want to benchmark every answer are using that as a starting point.

It's not always that way. Sometimes a regulation is just confirming something that a lot of good allocators already do. Let's say, some new scrutiny in the US for pension funds around cybersecurity; everybody took modules from the AIMA questionnaire right, and started to make sure they're using them. And that's a good starting point. And over time that evolves from those yes and no answers to more open ended more specific, nuanced questions, sometimes varying by your strategy.  

That is part of the ebbs and flows. Something new comes out, people will respond. If you already have access to templates as AIMA members, you can prepare yourself for potential questions. At the very least think about them, if not already have them filled out and ready.  

So, we're seeing number of questionnaires increase, the number of LPs using more questionnaires, as opposed to consuming directly from data rooms, and the length of the questionnaires increasing.

The counter we have for that is manager and GP technology. With platforms in place. there'll be more questions, but it'll be easier to answer them. You know what questions they're likely to ask, whether driven by regulation or benchmarking. And you have the tools to potentially automate that reduce the pain points around actually responding.

James Hopegood
That's great. Now, given that we've got some ebbs and flows here. And I guess one of my questions to you will be, how can firms use this to their advantage? Can they check out pinch points when they need to allocate resources? Then allocate resources? How would you suggest they think about managing, not just managing the funds, but also turning this sort of rhythm to their advantage?  

Spot the peak times in advance and get ready for them 

Liron Mandelbaum
I think the rhythm has a trend. When it rains, it pours, right. So if you seeing typically that there's a cadence of quarterly or annual questionnaires coming in at a predictable time, when you see one allocator come out of the blue with something ad hoc, you can immediately anticipate that more will come.

So you can mechanise the answer in a system, so everybody can deliver it consistently across the IR teams, right. And this is what we're saying. Smooth out that effort of responding, so it's not a fire drill every time.

So use technology to smooth to smooth out the demand, to automate certain answers. And use that same technology to create your documents, right? That same tool to help you search and answer. External questionnaires can be used to create your own internal questionnaires that you could then put into your data rooms, right. If you already have those answers, and have created templates that's how you smooth out the noise and get ahead.  If you've answered one AIMA questionnaire, you can use those answers to prefill. You might have answered another one that's slightly different, maybe more focused on a certain new strategy? A lot of your historical answers have the insights that you need for responding to new questionnaires. You just need to connect them. Technology can do that. 

James Hopegood
That's excellent. Thank you very much. And thank you for your very kind references to our quite comprehensive suite of DDQ information, which is on our website, available to members along with other things in relation to changes in the beneficial ownerships legislation in the US and things like that.  So, Fiona, would you like to take us to the the topic of the moment?

Finding 3: DEI and ESG questions have increased 10 fold AND they are being answered

Fiona Sherwood  
So again, I'm not sure this will come as any great surprise, but just looking over the last two to three years of questionnaires. It's no surprise, but more DEI and ESG questions are being asked, but what what was slightly surprising is that they are also being answered. So they're not just being asked and met with a no or a blank, they are actually being answered.

So we found when we looked at actual numbers of questions, we found a 1600% increase in the incidence of ESG, or diversity related questions. Now, we thought that was incredibly high. So when we parsed it out and found an average, we found that there's an average 10 times more ESG and DEI questions featured in the DDQs that are passing through our platform.

It's not just that there's an ESG section or a diversity section. The questions are being peppered right through the DDQ now. They're popping up in every different category of questions. So every subsection. Which actually is very encouraging, in my opinion.

Back in 2020, it would probably get as complicated as "Are you a PRI signatory?" and "Please describe your sustainability reporting". Now we're looking at, are you a signatory? If yes, what's your score?". "Do you publish a TCFD report? Please attach." "Please attach your ESG policy." Interestingly, around 85% of managers that we looked at, HAD provided their ESG policy. So if you haven't got one, obviously, you need to create one. Allocators are asking really specific things like, "Please describe your process for monitoring climate change risk", and "How are you using ESG factors in the weighting of your security?" So it's actually getting quite detailed now. It's no longer just enough to be a PRI signatory.

James Hopegood
Thanks, again Fiona for looking at this. Where does it move from being a due diligence issue to one where you're talking about wider corporate governance? And what does it tell us about how thinking on DNI and ESG is developing?

No need to ask why but what is the current state?

Liron Mandelbaum  
Yeah, we're still quite in a phase of data collection for benchmarking. It feels like a lot of firms are collecting data, they're getting more of it. In 2019 a lot of firms just didn't get provide diversity information for example. Certainly not environmental considerations, because it was hard to get and didn't seem like anybody was doing it. Today, that's not the case. Large firms are providing a lot of detail, they've built infrastructure to provide it. Whether driven by regulation, or the fact that they've noticed other firms had better response on DEI information. It used to be fine to say you didn't have the data, and now we're seeing the largest firms definitely DO have this data.  

What that means, on the allocator side, now that they have this data is now they can create those benchmarks. I keep using that word, that's where everybody's headed.  When we started about four years ago, a lot of due diligence was checking boxes and making sure that you have information, you reviewed it, and it's a red flag or no red flag. Now that our clients have a lot more data, they can create variations and calculations and try to quantify risk better, during the ODD monitoring process. They're trying to quantify operational risk and compliance risk.

Now in the ESG, DEI space everybody's at the benchmarking phase, and it's starting to evolve to quantify that in terms of risk.  

If it's an ESG focus fund there's serious fines, if that's not done well. As far as diversity and equality, that's still being explored. But the benchmarking is definitely happening. Clients have been using our system dashboards, to see outliers. So as long as you're not misrepresenting anything, it's really a dialogue. The benchmarking is not there to kick somebody out. Certainly not after they're already invested in you. It's really there to inform the way they make decisions. And we're finding that our allocators and consultants are incredibly open to dialogue.


Finding 4: Dialogue has increased in the platform by over 400%

So, leading on nicely, we have an in app messaging platform, and we've looked at the instances of dialogue taking place on that, and that has definitely increased more than 400% since 2019. We're seeing a lot more back and forth. We're seeing a lot more clarification on questions, which we believe is a really good thing.

What does this mean for managers, is it positive?

James Hopegood  
I suppose the question there is, does this does it mean that the work is becoming more complex or too complex? Or are that is it that firms are simply thinking more deeply about it now? And they'll bring more thought into it and therefore asking more questions. 

See the dialogue as a chance to learn and craft better responses

Liron Mandelbaum  
It's more thoughtful, I would say, in the alternative space. The allocators and consultants value the relationship with hedge funds and private equity firms. And they're very worried about the number of questions they send them. They worry about asking questions that are not relevant. They actually care.  For more traditional firms, investments tend to be more transactional, very transparent, when you're investing in a more traditional kind of fund. But in alternatives, there is a relationship, and there is a dialogue. And hence, you know, this 400% increase in conversation.  In the beginning Fiona said, we're focusing on the alternative space, the questionnaire is going to alternative funds. And you know, the change in usage is a little bit higher. 1.5x the traditional investment sector. So there is more conversation happening.  A year ago, we did this presentation and one of the key recommendations to managers is try to have a dialogue. When you see a question that that doesn't seem to fit, or you're you have any concern about the implication, our system allows for that, you should ask more questions and engage with the allocator. They might provide you with the benchmarking to say are you in line or not in line with others. It also allows you to ask them what's driving this change? I think that was another insight from a year ago, we said anytime you see a new question, remember that there was a lot of thought put into that new question. The allocators have committees to decide whether they're going to ask these new five questions. That means that it really matters, new questions matter a great deal. From our experience the allocator teams are very open to discuss why these questions matter now. They might even give you a little bit of insight to what answers they're expecting. Are you looking for a long answer here, just looking to confirm that we do something? They'll tell you.

James Hopegood  
That's great. I'm not sure if the if the data supports diving a little deeper, but are there any particular themes that have emerged among this 400% increase? Is there any particular areas that there's been more questioning about? 

Fiona Sherwood  
It's a case of looking at the incidence of usage rather than looking at the actual communications. You know, we've had to stay quite high level with it, because there's such a huge amount of data. And where I can see responses, I can't actually delve into what the dialogue is, and what's taking place. So that might be something that we we have to look at as a separate exercise. For example the ESG policies. I can see that they've attached them, but I haven't got the bandwidth to kind of delve in and look at them and sort of see what sort of quality they are. But that would be a really interesting exercise, I think.

Managers could take the lead and open the channels of communication before allocators or consultants do

Liron Mandelbaum  
I would say there are two sides to this dialogue is, it's in the two sides of who initiated first? Is it the manage or GP asking for clarity first? Or is it the the allocated LP, asking after they got an answer for more clarity, right. An eye opener for the managers using our platform is that you can and should initiate the clarification request from your side first. And so, you know, that's something we have to look at the data that might be actually very interesting thing to see. The current trend is far more of the allocator initiating, asking for a little bit more information. But what happens next is up to the to the manager and GP. Do you use this as an opportunity? To ask a little bit deeper, ask them a question about the relevance of what they've asked? Or do you just provide that data point? Reactively respond.  Allocators get nervous too. Why are a handful of my managers not responding with enough detail? Not that it's a red flag or anything like that? It's really, am I asking it incorrectly? 

Finding 5: Third party services providers are being more closely scrutinized than ever before

Fiona Sherwood  
Okay, so final point. Third party service providers are now being more closely scrutinised. So, two, three years ago, the questions that were asked were who is your administrator? Who's your custodian? Have there been any changes? Now, we're seeing questions around, control, review audit of those third parties. How do you select them? Do you use an RFP? What are your SLAs? What are they providing? And, can you can you actually back up your decisions. And I think personally, from a manager perspective, if you're an emerging or a new manager, you're not going to be using tier one service providers, you're probably going to be looking at tier two or three service providers. It's just about having the controls and the processes in place to demonstrate your decision making,  and ensure that they're still fit for purpose, in year 2, 3 or 4.  

When you look at IT control questionnaires, business continuity, cloud, cybersecurity questions, they're almost due diligence questionnaires in their own right. Some of those sections stretch up to 80 questions long. They're huge.


Even two or three years ago, they were not as big a deal. So you really do need to either pass that on to your service provider or have those responses ready because an 80 question IT DDQ is going to take your team a long time to complete.

James Hopegood  
Thank you very much. What, what can firms use? So you've got a lot of data here that's coming in, it's quite a rich set of, of qualitative as well as quantitative data. So how can how can firms make the best use of this kind of information as it comes in?

Managers could look at their own data collection tools to manage the data collected from service providers

Liron Mandelbaum  
There's a lot of data that firms have access to. We are seeing more managers and GPS using our Collect product. They might have used us to respond or to automate the response.

Some managers now have the fiduciary burden, to have a deeper analysis of their vendors and third parties. So now they're collecting their own data. And now they're building their own benchmarks in terms of vendor and third party due diligence.  

Regulators are honing in on third parties

Regulators are becoming more ambitious with what they're expecting too. I'm speaking specifically in the US. But the SEC is proposing to put extra burden on investment advisors for use of third parties. So we're in the phase, again, of this data collection and benchmarking. And the idea is that it should get us to that phase naturally leads to insights, right, hence the name change of our business to Dasseti - which means to make visible.  Vendor analysis has been done for a long time and everybody's got history there. But that's evolving. So I would impart to the GPS and managers listening to think in terms of: Are you collecting your own data? Are you building your own history to now make your own risk decisions, or articulate the way you make this decision in terms of third parties and vendors. Because that change is coming to you, too. You're going to be on the other side, and you're going to realise why there's so many seemingly repetitive questions asked. Because you need to know in great detail. Especially if a regulator thinks that it is part of your financial responsibility now, not just something they can fine you on, if you do a poor job of estimating the risk and tracking risk on your third parties. It's coming full circle, everyone's gonna have to collect more data.  But the software tools neutralise that. Necessity is the mother of innovation. And we are building tools, platforms to address the challenges, and facilitate deeper due diligence.  

You know, when you introduce technology, those 20% increases in questionnaire lengths; they never go down. The waterline never goes down with diligence when it's digital. But technology will enable you to handle it.

It will give you the tools to protect you from the waterline increase in terms of fiduciary responsibility, and let you earn more revenue and increase your funds by answering these RFPs.

What about small managers v large managers - do allocators have the same expectations?

James Hopegood  
Excellent insight. Thank you. I think it's fair to say that focus has increased on concepts, such as delegation, outsourcing, and resilience.  Well, that's the end of the formal part of the presentation now. So if anyone has any questions, just to kick us off, just a couple of thoughts. Firstly, we've been talking about the difference in responses, sometimes from smaller and larger firms. But can you talk a little bit about proportionality in the requirements to do this? So where are the baselines where everyone has to derive this basic level of information and where is, (if it exists) room for smaller firms to be treated proportionately? Proportionately, in the amount of data that they have to provide, compared with larger firms.

Allocators and consults do have different expectations of smaller or emerging managers

Liron Mandelbaum  
There's definitely an understanding from allocators and consultants around the size of the firm and resources. It might not feel that way when you get the questionnaire because they won't adjust the length of the questionnaire based on the size of the of the manager. But this is where that dialogue comes in, in terms of what they're expecting. They're benchmarking, not just the response in terms of the asset class, but another variable of the fund size.  For example, going back to explanation of vendors; You can't, you shouldn't, as a small emerging firm have a tier one, auditor. It would be seen as a bad use of fees and funds, right. So allocators and consultants have that benchmark to know what to expect there.  How can you be certain? Have a dialogue? Again, I find that consultants and particularly, allocators are most eager to help the smaller firms in terms of understanding the benchmark what's appropriate. We're finding more and more allocators are happy to have a dialogue and tell them, here's what we're seeing. Here's what we would hope you would have. Here's who we can even recommend, as terms legal counsel or outsource, compliance, things like that. There's definitely an understanding of the size of the firm and ability to answer.

James Hopegood 
Thank you very much. One other thought for me, we've seen this legislative initiatives going on at the moment, both in Europe, as well as in North America. So I'm thinking about the anti money laundering laundering package that's going through the legislative process at the European Union. And the FinCEN, Financial Crimes Enforcement Network, new rule on beneficial ownership register, that's the first step of Federal Register. How are these? Do you think how these leading to practical focus from regulators? What sort of, are you seeing a change in emphasis on what they're asking them what they're looking for? Is it simply they want a bit more information? Or are they sort of changing the sort of the chin slightly as to what they're worried about?

Liron Mandelbaum  
So you are asking how these regulations are affecting compliance in terms of what they're looking for, and the way they do AML and KYC? It's going to drive them to ask deeper questions, more frequently of parties that they might not have engaged at that deeper level. The regulators are requiring you to do your own due diligence. Trust, but verify the information you're getting. We're seeing an increase in use of a background check providers for example.  

Wrap up and goodbye

James Hopegood
I think you've, you've given an enormous, rich and rich enrichment of data there. And I look forward to watching it some development. And hopefully we'll see it again next year. So I would like to thank you both for a really useful, insightful and above all, extremely practical run through of this very, very important subject. So thank you both very, very much.

Fiona Sherwood  
Thank you

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