The Capital Allocator’s Perspective – Framework for Operational & Investment Due Diligence

The record of Operational & Investment Due Diligence within private equity, real estate, hedge funds and traditional investing has been dismal through the ages. An after the fact event, it is usually about shutting the barn after the horse has bolted. The function has done very little to insulate investor portfolios from losses. The activity has devolved to fiduciary CYA, designed to protect the wealth management firm, pension or sovereign fund, consultant or product purveyor from liability. In going through a roster of standardized questions, to which are offered standardized answers, it is about dotting the ‘i’ and crossing the ‘t’.  One now sees new digital platforms that collate, collect, structure, and offer fund manager data for easy access to prospective investors.

The Capital Allocator is in the business of entering into partnerships with fund sponsors to potentially generate significant returns, mainly through long-term capital appreciation, by making, holding and disposing of privately negotiated equity and related investments.

Such investments are usually made as a passive investor in vehicles directed by a third party fund sponsor; as a result, the investor has only indirect influence over-achieving ultimate investment objectives. We believe that a methodical approach to selecting sponsors—which combines scientific rigor with seasoned subjective judgment— may contribute to creating strong results in a variety of economic environments. We present here a ‘best practices’ framework for selecting financial sponsors. We draw attention to important issues, metrics and considerations deemed worthy of exploration.

What follows does not represent an exhaustive list, of course. Each investment and operational diligence mission inevitably take one down paths that are not common to other missions. One must be prepared for this—and even seek it and relish it. For, it is forays beyond the common and readily available, that enable real insight into the people with whom one entrusts with one’s capital.

What is missing is the capital allocator’s nuanced perspective. We suggest one here.

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Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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