Example Due Diligence Checklist Items
Increased Compliance Focus During Operational Due Diligence Reviews
Operational due diligence reviews performed by ODD analysts and investors have increasingly devoted significant portions of the overall reviews towards compliance related matters. A 2017 book by Jason Scharfman of Corgentum Consulting titled, Hedge Fund Compliance: Risks, Regulation, and Management outlines that the reasons for this include the increased complexity and volume of global compliance regulations relating to alternative investments. It has also been suggested that this trend will continue as changes in established regulations, such as Dodd-Frank, are being considered in the U.S.
A 2018 companion book by the same author titled, Private Equity Compliance: Analyzing Conflicts, Fees, and Risks, provides evidence that the trend of having operational due diligence not just only incorporate, but also more heavily focus on compliance, has continued to expand in the alternative investment space to go beyond hedge funds into private equity.
Challenges Of Due Diligence In M& a
The M& A due diligence process is vital when it comes to such capital-intensive transactions. However, there may be a myriad of challenges that will make it difficult to understand the other company. This may eventually lead to delays or even canceled transactions or offers. Some of the main problems that arise during M& A processes include:
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An Equity Crowdfunding Investors Due Diligence Checklist
Did you know that your ability to diversify your investments can move way beyond stocks and bonds? Today, investors have access to an incredible array of alternative investments. You can invest in anything from at the click of a button. While these unique avenues may not interest you, technology has further leveled the playing field between Main Street Investors and Private Equity firms by allowing retail investors to invest through equity crowdfunding or startup investing. While equity crowdfunding remains risky with a high failure rate, the return multiples of just one successful startup can be upwards of 300x. Now, before you run off and invest in the latest startup, its important to perform your due diligence. We have created a 5-step Due Diligence Checklist for your equity crowdfunding investment.
How Long Does M& a Due Diligence Take
As in the case of the overall M& A process, due diligence can take time. It is important to have quick access to all the information you need but, even in this case, collecting and analyzing massive datasets can be extremely time-consuming.
Some specialists state that, in general, the M& A due diligence takes from 60 to 90 days to complete. In some cases, it may take longer than three months, but most parties would find that a lengthier due diligence process can negatively impact the deal.
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Best Practice #: Collect All Relevant Documents
Two of the most critical steps in any ODD process are:
- Developing questionnaires
- Collecting and reviewing the necessary documentation
The documents reviewed during ODD can provide crucial inputs that you will need to start due diligence, prepare necessary reports, and confirm that the investment is viable and meets all necessary criteria.
However, simply collecting documents is not enough because you may end up missing some red flags in the operational infrastructure that can cause problems later. Also, make sure you review all documents carefully to get the maximum value from them.
These include documents related to:
- Due diligence questionnaire
- Cash and liquidity internal controls
- Independent pricing and asset valuation policies
- Compliance policies and manuals
- Regulatory filings such as the SECâs ADV
- Operational policy and procedure documents
Benefits Of Using Alternative Data For Due Diligence In M& a
Fortunately, most if not all of the challenges mentioned above can be dissolved using alternative data. In short, there are several types of alternative data you can use in your M& A due diligence process to improve accuracy and speed it up:
Firmographic data, such as size, industry, category, and other identifiers, can help you in the initial stages of selecting potential target companies.
Company employee reviews alternative data helps you obtain a clear, objective insight into your selected companyâs workforce. This can be easily used to perform sentiment analysis, so you learn more about how the employees feel about their workforce. In turn, you can compare this with your companyâs culture to identify compatibility or issues. Also, you can easily identify risks as negative employee reviews are a potent sign of bubbling internal issues that you might not find out using traditional data.
Company funding data allows you to access the specific investment stages and the amounts raised by your target company.
Job postings data provides you insight into the companyâs growth and hiring activities to better understand its business strategy.
Tech product review data help you identify the market sentiment for your target companyâs specific products, which is important for correct valuation. You can further enrich this step with technographic data, which provides an insight into the companyâs technological stacks, tools, assets, and even technology online mentions.
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Where To Find Information For Your Due Diligence Investigation
Uncovering all of this information is time-consuming, made even more strained by the fact that sensitive financial information is hard to find for private companies. PitchBook tracks financial data on more than 3.1M+ companies across the globe, including cash flow statements, balance sheets, income statements, financial ratios and multiples, consensus estimates and fundamentals.
Access to comprehensive company data enables you to do deeper due diligence for any business decision. Plus, as told by one of our clients, better information leads to better negotiating.
Ipo Due Diligence Checklist
The days, weeks and months leading up to an initial public offering are absolute chaos. Getting the right information into the right hands at the right time can make or break your venture. However, organizations can prepare by exploring this extensive due diligence checklist provided by Columbia University.
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M& a Due Diligence Checklist
UpCounsel created this M& A due diligence checklist guide with a mix-and-match approach in mind. Indeed, they invite organizations to use and edit the document to fit the unique needs of each project. Choose from these 19 categories and more than 200 checklist items to create your own ultimate DDQ template.
- Antitrust and Regulatory Issues
- Revenue streams
When Do Companies Issue Ddqs
The due diligence process is intentionally complex. Indeed, it is designed to dig up details and surface insights that may otherwise be overlooked. So, a DDQ isnt a good all-purpose, information-gathering tool. It delivers the most value in the following situations.
Mergers and acquisitions due diligence
Due diligence is crucial in M& A transactions. Prior to completing the transaction, the buy-side organization must verify that the investment is sound and will likely pay off. Typically, the questions cover general company records, personnel information, financial data, current contract obligations and legal matters. If a company is deciding between several similar opportunities, the information can be used to compare business risks and value side by side.
Investment due diligence
Due diligence questionnaires are useful in a variety of investment situations. For example, common projects well suited to the process include hedge fund due diligence, institutional investment due diligence, IPO due diligence and venture capital due diligence. Investment due diligence questionnaires explore topics like company founders, customer and supplier information, intellectual property and competitor analysis.
Vendor due diligence
The term vendor due diligence has two distinct meanings. Once you know the difference between them, its easy to identify each within the context of their usage.
Proactive sell-side due diligence
Third-party risk assessment
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What To Ask When Conducting Due Diligence On Private Equity Funds
Are you conducting due diligence on private equity fund managers? Create your PE due diligence questionnaire with the help of these sample questions.
In our previous article What are the specificities of due diligence questionnaires when applied to alternative investment funds, we concentrated on the specificities of the DDQ for Hedge Funds. In this article, we focus on DDQs for Private Equity Fund Managers.
Investments in Private Equity funds are by nature long-term and illiquid. This puts an additional pressure on institutional investors or LPs in order to conduct a thorough due diligence and try to separate luck from skill. Manager selection in this asset class is crucial.
The quantitative side of due diligence of Private Equity Funds and in depth analysis of track records is challenging due to many reasons like: having access to enough detailed cash flow data from GPs , the potential dispersion of returns, and the difficulty of comparing a private equity funds return to another. The due diligence done on PE funds is often more qualitative with a focus on topics like the management team, the deal sourcing capabilities, the investment thesis, and operations.
Therefore, the process and tasks around it should be well defined, executed, tracked and documented.
Creating a PE due diligence questionnaire, or in a way a checklist related to the asset class specific issues, is one of the fundamental steps towards successful due diligence on a private equity fund.
Are The Requests In The Template Comprehensive
No. Our Due Diligence Checklist is drafted to include typical requests that are relevant in most transactions. However, every deal and every target company is unique. Before utilizing any template, it is important that you review it with the help of your legal and other professional advisors to ensure that the requests are complete and tailored to the specific circumstances of your deal.
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More On Due Diligence And Dealmaking
Hear more from our clients on how they use PitchBook for due diligence and why our platform is one of the most important tools for discovering financial information and validating business decisions. Plus, learn how you can leverage the platform to make deals with our PitchBook for Dealmakers guide. Beyond sizing up potential investments, our clients also utlize PitchBooks valuation and comps tools to revisit the valuations of existing portfolio companies regularly.
Close deals faster by streamlining your valuation workflow, building more accurate comps and connecting with the right investors or buyers
Best Practice #: Use A Multi
Today, it is critical for Investors and Managers to provide a superior Operational Due Diligence process experience. The best way to do this is to bring all parties together to complete the ODD process.
Using a multi-party platform like ODD360 will bring all parties into the same environment, which will allow recipients to assign questions internally, collaborate, set up approval workflows, and access audit trails.
The shared environment will also eliminate the need for multiple emails, document formats, and communication channels, further simplifying workflows and boosting collaboration for better overall best results.
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Key Odd Questions Include:
- Are any of the terms in the offering memorandum outside industry standard?
- What are the details of key vendor relationships?
A thorough examination includes a background check on the manager and key employees, and verification of third-party service provider relationships. Operational due diligence should not stop after the initial diligence. In addition to an annual review, ODD consists of ongoing manager monitoring including an investigation of any updated documents, regulatory filings and audited financial statements.
Operational due diligence for LP investments in private equity funds is catching up to more refined checklists for hedge funds. In 2018, the Institutional Limited Partners Association, which is focused on private equity, issued a revised 29-page Due Diligence Questionnaire. A completed DDQ is not a rubber stamp. Diligence starts here, but red flags should be probed and background checks conducted to avoid ill-fated investments.
The challenge for many institutional investors is lack of sufficient resources or expertise to properly perform operational due diligence. Fortunately, there are providers with both the scale and know-how to do this critical review.
Did you know that nearly half of institutional investors recently polled use multiple systems for investment processing and their staff uses offline spreadsheets for some manual processes?
Preparing For Your Equity Crowdfunding Investment
If you are truly considering a startup investment, there are excellent equity crowdfunding sites dedicated to creating education around investing in startups. One of the best I have come across is crowdwise.org. This site takes a deep dive into creating a successful strategy around equity crowdfunding and is full of great educational materials.
However, if you are looking for a great place to start your equity crowdfunding due diligence, then look no further than our 5-step due diligence checklist:
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Conducting Due Diligence Related To Alternative Investments
12 Dec 2013
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While conducting due diligence related to alternative investments is similar to the process for evaluating traditional domestic investments, there are unique areas of concern to consider. Many alternative investments are foreign-based and generally not subject to comprehensive disclosure requirements and regulatory standards. Trustees have new variables to consider, such as political stability and foreign currency translation, which are not associated with domestic investments. In addition, these foreign-based investments may lack protection from corporate fraud, depending on the country in which the investment resides.
Effective due diligence related to any investment is critical and is best conducted as a two-part process. Initial evaluation combined with ongoing monitoring is the most effective way for trustees to conduct due diligence when considering new additions to a plans investment portfolio, and alternative investments have some unique considerations along the way.
Initial Due Diligence
For more information on UBI, please see the prior Lindquist Solutions article: Investments and Tax Awareness: Tips for Trustees
Operational Due Diligence Best Practices: A Checklist
Is your organization looking to invest in a private equity fund, hedge funds, or some other alternative investment? Before you invest, you must undertake operational due diligence .
ODD is an investor-initiated process for assessing the operational infrastructure of investment managers and funds to both detect and mitigate potential operational risks associated with the investment.
That said, ODD often relies on numerous manual steps, long due diligence questionnaires , confusing workflows, and scattered documentation.
Moreover, ODD practitioners often have to track and monitor the status of multiple requests over multiple emails.
All these elements are challenging to manage and optimize. They also bog down the ODD process, cause frustration and rework, and impact the quality of investment decisions.
Fortunately, thereâs good news for ODD practitioners.
You can take advantage of advancements in cloud storage, software-as-a-service, predictive analytics, and ODD automation solutions like ODD360 to minimize complexity, improve effectiveness, achieve scalability, and ultimately make the best investment decisions possible.
In addition to leveraging these modern solutions, itâs also helpful to follow tested and proven ODD best practices. With that in mind, weâve created a five-step checklist based on our experience working with allocators.
But first, letâs quickly recap why executing ODD is so critical.
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Aima Launches New Due Diligence Template
The Alternative Investment Management Association has published a new edition of its flagship due diligence questionnaire , 20 years after the first AIMA DDQ helped to standardise the due diligence process for alternative investment managers and investors.
The new AIMA Illustrative Questionnaire for the Due Diligence of Investment Managers will be used by investors assessing hedge fund, private credit and private equity managers. Completing the DDQ is generally regarded as one of the most significant steps that investment managers must complete before an investor decides whether to allocate to a fund.
The first AIMA DDQ, published in 1997, was mostly geared to managed futures funds and contained around 100 questions about the investment manager and the fund. Subsequent editions included more investment strategies, reflected changing business practices and took account of evolving regulations.
AIMA consulted with investment managers and investors while drawing up the new DDQ. For the first time, the questionnaire specifically covers private credit and private equity strategies as well as hedge funds. It also integrates the formerly separate DDQs specific to funds of funds managers and CTAs.
Other DDQs that AIMA have created are used to assess fund directors, fund administrators and cyber security vendors.
Notes to Editors
S In Acquisition Due Diligence
Undoubtedly, acquisition due diligence is a very thorough and complex process. Its steps may depend on the type of deal you seek to invest in, your objectives, and your data sources. As a result, every M& A process may be different in terms of requirements, steps, and methods that need to be used for its successful completion. More specifically, the due diligence process must fulfill the requirements of your deal.
Despite this, here are some of the more common steps involved in due diligence processes that any investor or business can follow.
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