How due diligence is shaped across private markets investments

How due diligence is shaped across private markets investments

30th July 2020

Private investments are commonly a long-term commitment that require considered and informed decision-making. As a result, investors need to have a high level of confidence in the firms and managers they allocate their wealth to. To achieve this level of trust, investors will need to analyse the financial, legal and operational risks they face through thorough due diligence. 

From forensic analysis through to desk-based reviews, detailed due diligence should ensure key risks are identified and understood. Due diligence is a core component of any investment process, yet it is arguably even more important when allocating to private markets. As an increasing number of investors tap into private asset classes, demonstrable due diligence processes can offer confidence to those making the move into illiquid investments in search of greater returns.

To highlight this crucial component within the investment process, we spoke to Jeremy Bryant, Senior Vice President of Investment Advisory at MJ Hudson.

Hear the full talk

Broadly evaluating risk exposure

Asset management often requires a lot of relationship building. So, a good starting point for any investment due diligence process is just that: the people and the quality of the team. Questions about the team’s background, experience and decision-making process provide a flavour of the business’ culture and whether these meet your expectations sufficiently to back them financially.

One of the other things to consider is the project or business strategy and methods. Do the investor’s objectives align with the managers, and is it a high-risk or a low-risk investment? The investment strategy must fit with the investor’s appetite for risk and return. This is especially the case in illiquid deals, where the commitment and return on investment can take several years to materialise. 

Evaluating the market environment and its outlook

Due diligence should not overlook the market environment. What are the business’s view on the market and the external factors that can impact its performance? While few would have predicted a global pandemic on the scale of Covid-19 and its impact on certain industries (hospitality, aerospace and healthcare to name a few), it highlights the importance of market analysis. A due diligence process should consider these external pressures and analysis should be conducted to confirm whether investment opportunities are priced accurately in relation to market performance and outlook.

You may not be able to avoid all risk, but you can limit exposure

When it comes to operational due diligence, your process needs to cover those business elements that carry risk but which are an inherent part of running a business. Operational risk mitigations can include people, procedures, policies and the quality control systems an organisation has in place. It’s often not possible to fully mitigate risks, but robust documentation of how the risk is managed can create confidence for investors, who will be looking for signs that the business is run in a controlled and responsible manner.

A topical example is how business disruption is managed. While this is nothing unique to private markets, business continuity plans have become sought-after during the pandemic. Factors such as remote working capabilities, cybersecurity and data controls will continue to be important. As a result, many will want to find out if online security and resilience is regularly tested by external companies.

ESG factors are becoming more and more pertinent

The due diligence process is complex and considers a wide range of factors. Investment, operational and legal considerations are widely accepted as the core principle. Yet, as impact investing continues to grow in popularity, more investment opportunities are now also reviewed on an ESG (environmental, social and governance) basis. As this type of investing becomes prominent, calculating social impact in your due diligence will likely become the norm.

In short, a robust due diligence approach should be repeatable and cover multiple angles. In doing so, your process can build assurance and conviction by performing:

  • Investment due diligence;
  • Operational due diligence;
  • ESG due diligence; and
  • Legal due diligence


If you need more information on risk management within private markets, catch up on our recent webinar. Or, if you would like to find out how Delio can support you with your governance framework, please get in touch with our team.