Keeping an eye on the ball

LPs are demanding consultants and advisors conduct fund due diligence right up to the commitment date – or face legal challenges if losses are later incurred.

Advisors and consultants to institutional investors in the US are being pressed to spend even more time on their due diligence for fund investments, providing would-be LPs with regular updates on changes in the vehicle right up to the time when a deal is executed.

Unveiling a white paper on the issue, Yuliya Oryol, a partner at law firm Nossaman, and the chief investment officer of the $7.5 billion Los Angeles Water and Power Employees’ Retirement Plan, Jeremy Wolfson, said too often consultants would move on to other work once a recommendation for investment had been made. However, there was usually a time lag – sometimes up to nine months – between the time a recommendation is made and when a pension system commits the capital.

“These deals – and the markets in which the managers are investing – are constantly changing and pension consultants need to be conducting that due diligence until the investment is actually made. Appropriate and sufficient due diligence is needed at every stage of the investment process,” says Oryol.

One particular issue relates to other LPs in a fund. Wolfson says getting references from other limited partners already in the prospective fund could provide crucial information for a pension system considering a commitment. He also stresses the need for consultants to consistently review terms and conditions that could have been marketed by a fund in better times, and stay with the process through the end.

“Due diligence conducted by consultants only prior to the investment recommendation stage is insufficient without extensive follow-up thereafter, no matter how appropriate the investment recommendation may have been initially,” Wolfson says.

Oryol stresses the consequences of not conducting added due diligence could result in “significant monetary losses” for the pensions system, and could push some to consider legal action against consultants in a bid to “recoup some of these losses”.

“If consultants do not conduct extensive due diligence, as part of the financial advisory services offered to their clients, then they fail to provide the type of services needed to help their clients obtain the best possible returns and expose their clients to significant risk,” she adds.