Fund Managers Look Out. There’s A New Detective In Town
Court and regulatory filings have always been the two main areas that due diligence investigators look at to see whether hedge fund managers and private equity fund managers have fallen foul of the law. An arrest, multiple civil lawsuits, a fine by a regulator like the SEC or the Financial Conduct Authority, or worse, can mean the difference between an investment manager receiving an allocation or not.
Investors aren’t only interested in a manager’s legal history, however. The explosion of the use of social media and online publications in the past decade or so, for example, means investors are able to understand more about the person and firms managing their money by reading their Twitter feed, their Facebook profile and their coverage in vast media databases.
For every investment manager who thinks that everyone wants to know how great their car collection is, or how much fun they’re having at the beach, there’s an investor who is thinking about the downsides.
“The questions I get the most from clients are to do with distractions and reputational risk,” said Melissa Kelley-Hilton, Founder and CEO of investigative due diligence firm Hilton Global Associates. “What is the manager doing on the weekends? Are they involved in a divorce? Did they invest in an art collection or a vineyard? How much do they travel? Are they too committed to a political party? Do they race cars or do anything dangerous? This stuff has always been there, but with social media and people posting information it’s a lot easier to find out things that may affect performance and availability. The investor wants to know that the manager’s priority is their firm and fund, and not their hobbies.”
Kelley-Hilton, a 20-year veteran of the investigative due diligence industry, officially launched her firm last month. Hilton Global helps investors like pension funds, family offices and funds of funds to uncover any unflattering information about the people and companies who might manage their money. Kelley-Hilton has added Randy Shain, Co-Founder of BackTrack Reports (which he sold to First Advantage), to her team as Chief Operating Officer to fuel growth and help implement processes and technology to differentiate the firm in the market. Shain says that, despite the abundance of information available on hedge and private equity fund managers nowadays, finding the unpleasant truth isn’t as easy as scrolling through a Twitter feed.
“Our jobs have gotten harder, not easier, because of the amount of data available,” he said. “There are thousands of pages of information from court filings to regulatory filings, from social media to trade magazines that we have to distill into a report of just ten or so pages for a client. It’s not a case of pushing a button and then up comes a report.”
Because of the transparency that the internet and social media has brought to society at large, tales of fund managers getting arrested for drink- or drugs-related pursuits are on the wane; many managers have “grown up,” according to Shain. But for those managers who do have a blemish or two on their record, all is not lost. Investors can be reasonable when it comes to previous egregious behaviour, says Shain, although context is critical.
“If you have a hedge fund manager who is 40 years old now and had one DUI when he or she was 19, some investors will look past that, assuming it was a one-off and that no one got hurt. But a hedge fund manager getting a DUI at 40 years old? I’ve seen one example where a manager had three of them at that age. Seriously, just get an Uber. There are no excuses to drive home drunk now. If someone’s doing it in their 30’s and 40’s, then clients may call into question that person’s judgement and risk management.”
Aside from anything crime-related, fabrications of educational qualifications, job positions and professional designations are another area of focus, although this time, it’s more based on consistency.
“Nowadays, if you think about where your biography is, people do have a hard time keeping it consistent, because there are so many places it appears. There’s the questionnaire for the allocators, the LinkedIn profile, your board member bio, your wedding announcement, a PR Newswire press release,” said Shain. “But that’s not really an excuse. You have to be pretty exact, and truthful. We’re checking them all, and errors, omissions or inconsistencies do raise an eyebrow for investors.”
It’s not just the individual fund managers that Kelley-Hilton and Shain have their eye on, however. The firm-level information can be particularly revealing to investors.
“Managers always forget that we’re checking not only themselves personally, but their company as well. Are there a lot of people leaving? If so, what’s going on there? If something like this is a one-off, then maybe it’s not such an issue. But if it’s a regular occurrence, that could indicate a bigger problem. There are also reviews by employees online. These types of issues tend to be a big deal to investors,” said Shain.
It’s one thing diligencing an investment manager for a potential allocation, but diligencing business owners and entrepreneurs for private equity and venture capital firms is another proposition entirely – and one that’s oftentimes more fun.
“We find a lot on these guys,” said Shain. “The difference is that private equity firms don’t always want to hear the bad news, because they really want to get the deal over the line. They come to us late in the buying process, and because they have investors to answer to, any red flags can really mess up the process.”
“Because most business owners don’t work in as heavily regulated industries, there are more interesting cases,” she says. “They don’t always appreciate that there are people looking into their background. I’ve seen deals get derailed before because of what’s come up on the background check.”
Investigative due diligence has long been associated with finding out things that an investment manager probably doesn’t want found out. Times they are a changing, however, and for Kelley-Hilton, that’s certainly the case.
“We see more and more requests for analysis of ESG-related factors from our clients,” she said. “For example, if you look at the ‘S’ in ESG, then investors want to know that the manager is promoting diversity at their firms. Avoiding bad things no longer gets you a gold star.”
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