4 Due Diligence Power Moves to Steal From Successful Investors

While there has always been plenty of research on how investors conduct due diligence from a quantitative perspective, there hasn’t been much to analyze qualitative due diligence. Until CAIA released a research report on The Art of Due Diligence: Exploring the Qualitative Aspects of Manager Research. Our founder, Stacy Havener, was interviewed by Aaron Filbeck, CFA, CAIA, CIPM, FDP, regarding this research. She spoke at length on the gap that needs to be bridged between investors (allocators) and portfolio managers, a great read for investment boutiques. Filbeck also asked Havener to talk about the characteristics of the most successful investors, the ones that do it right.

Here, we share these practices to help more investors find the investment boutiques that are right for them.

Investors who excel at qualitative due diligence help founders / portfolio managers speak their language.

A PM is likely going to come to a meeting with you, prepared with a pitch deck. If they come from the institutional world, it’s all they know. Performance, performance, performance. (Yawn.) If you know you’ll just be waiting for the slides to conclude so you can ask the questions you really care about, let the PM know at the beginning of the meeting, “Hey, I've looked at your materials, I have questions about your portfolio, but what's important to me is just to get to know you.” Most PMs will follow suit, but they aren’t likely going to come in with that expectation (unless they’ve read this blog post or CAIA’s research). They want to be prepared and they don't think the qualitative part is what matters to you. Help guide them.

Investors who excel at qualitative due diligence are thoughtful with their questions.

Some great questions we’ve heard get to the heart of who an investment boutique founder is and whether they are trustworthy:

  • Where did you work before? 
  • Why did you leave? 
  • Why did you set up your own shop? Being an entrepreneur is no walk in the park. 
  • Who was your mentor?
  • Who are your competitors?
  • Which of your peers do you respect?

Even before you get to background checks, there's a human element to these conversations early on that can give you a sense of who someone is. Get the PM talking so that you, as the person conducting the due diligence, can get a feel for who they are.

Also assess the due diligence questionnaire you have them fill out. Did they just phone it in or did they give heartfelt, thoughtful responses?

Investors who excel at qualitative due diligence are patient; they take their time.

After talking to the founder, they talk to the other PMs and analysts alone. Talking to individuals separately helps you discover where the team is aligned and where they are disconnected. 

Many investors also take the time to get references. While obtaining references doesn’t help a ton because a manager is of course going to give you good references, glowing references can help give you confidence moving forward. And there’s no better reference check than asking people in your network if they know this portfolio manager.

Investors who excel at qualitative due diligence are transparent.

After a series of meetings between an allocator and one of our clients, the investor said, “We're going to take a pass.” BUT they gave us their reasons when we asked. So refreshing! It was a loss (for the time being)… but we knew what was important to them. Investors want managers to be transparent and communicate with them so it's only fair that you provide them the same. Instead of saying, “Oh, maybe I’ll watch it,” or some pretend reason you won’t allocate, be transparent. This helps the manager improve or fix the problem. If they keep hearing the same thing (i.e. your fees are too high), they might actually address the feedback and you might have an opportunity to invest. We speak from experience; remember the investor who “took a pass?” We addressed their concerns and they are now allocated to our manager!

If you have open lines of communication, if both the allocator and the portfolio manager are transparent and honest about what’s working and what’s not, you are building trust. That’s a great place to start.

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