DiligenceVault recently attended GAIM Ops Cayman, a premier conference for alternative investment operations. We connected with investors, managers, and service providers to discuss industry trends, with standout sessions on operational due diligence (ODD), AI adoption, compliance risks, and vendor oversight. Beyond the beautiful setting, the event remains a valued opportunity to learn from clients, partners, and peers. Some of our key takeaways are below:
Operational Due Diligence Best Practices
- ODD was described by an experienced practitioner as a blend of audit and consulting, offering teams unique insights into managers’ operations and a platform to share best practices.
- Tech adoption is helping teams manage reviews that are increasing in complexity and associated data and documents that require review.
- Digital assets and semi-liquid private market funds remain key focus areas, with many viewing this as an area of needed market education.
- “Good people and good software solve most issues” was a principle shared on how to have an effective ODD program.
- Growth in non-commingled funds and SMAs brings complexity—particularly around trade allocation and investment guidelines.
- Many firms are shifting to risk-based monitoring, rating managers by asset class and investment size.
- The use of ODD consultants varies with the size and expertise of the in-house team. Many are incorporating a co-sourced program rather than solely in-house or outsourced.
Vendor Due Diligence
- As firms and operating models continue to become more complex, the number of third party vendors is on the rise.
- Some groups are trying to do more with select vendors to limit the oversight burden and operational complexities.
- While the SEC’s proposed Rule 206(4)-11, also known as the “vendor due diligence” or “outsourcing” rule, has not been finalized, many firms are taking steps to fully implement it.
- The types of service providers vary greatly as such there is a different level of depth and type of review each vendor needs.
- Ranking the criticality of vendors and applying a risk based approach, similar to what many are doing in ODD, is being applied to vendor oversight. The type of information held (PII, financial, corporate etc.), criticality and part of the business process, and AI usage are some of the key factors.
Reputational Risk & Negative News
- Common amongst ODD and vendor due diligence discussions was mitigating reputational risk and monitoring of negative news.
- Many asset managers and allocators have set up daily negative news alerts with both vendors and their third party asset managers.
- Onsite meetings and background checks are two key ways assess this risk.
- Increased transparency and proactive communication during periods of stress of negative news help maintain trust in the partnership.
- Asset managers doing more background checks on their key employees is a positive trend and shows client commitment and alignment of interests.
- Many firms have adapted their incident response policies to include for negative news or other types of incidents, with several firms hiring communication/PR consultants on retainer.
Rise of AI
- AI continues to be at the forefront of discussions around technology, processes, workflows and how managers/vendors are using it.
- Usage lags curiosity, with the exception of Microsoft Copilot and enterprise ChatGPT.
- One speaker referred to AI as “unlimited interns with infinite memories” to describe how it’s being leveraged for initial drafts and repeatable tasks.
- Education and upskilling are two current priorities.
- DDQ/RFP automation continues to be one of the highest areas of interest by investors and asset managers.
Yellow Flags Turning Red
- Pass through fees especially in multi-strategy hedge funds.
- Growth of private credit can lead to concerns of increasing defaults, drying up of lending, valuations, and lower underwriting standards lower given amount of capital.
- Governance with trade allocations, cash movement policies, and increased leverage in both public and private markets are other continued areas of scrutiny.
- Managers who are not open to feedback from ODD teams.
- Improper policy and disclosure of AI use – is it in your Form ADV?
- Use of expert networks, particularly in certain sections like biotech and pharma and medical where experts are prone to oversharing, need closer monitoring.
- The ability to stay on top of global regulatory bodies, particularly outside of the US, continues to be a challenge for legal teams. The key questions to ask are how does it impact us, when will it impact us, and how do we communicate to our team and our clients?
