Pocket Due Diligence Checklist

Large family offices and institutional investors usually make a point of performing due diligence, but what about smaller investors? Detailed due diligence checklists can be several dozen pages long and can entail multiple office visits to various service providers. Such due diligence can be expensive and time-consuming, straining the limited resources of smaller investors.

So what can smaller investors do to properly vet out a potential investment? Here are a few questions to ask prior to making any investment:

1. Who are the service providers? You should find out who the auditors are and if they are registered with the Public Company Accounting Oversight Board. Ask which law firm assisted in the creation of the fund documents and whether the law firm has experience performing services for investment companies. If the investment company uses a fund administrator to assist with back office functions and investor reporting, is it a recognizable fund administrator? Ask if the fund has seen the administrator’s Service Organization Control (SOC) report, to make sure data is kept secure.

2. What is the investment manager’s track record? Find out whether the track record is audited and how long the investment manager has been in business. If the returns seem too good to be true or the investment manager is pressuring you to invest quickly because you will miss out on the opportunity, steer clear.

3. What is the investment manager’s strategy? The strategy should coincide with industry benchmarks.

4. Have you thoroughly read the investment company’s offering memorandum and do you understand all the terms? You need to understand the expenses the investment company is allowed to incur. Are there redemption gates and onerous terms? You may want to avoid investments with redemption terms that could unduly limit your ability to redeem from a fund. Also ask how the investment manager is remunerated and make sure the remuneration is in line with industry standards.

This is not an all-inclusive investment due diligence checklist. However, asking these questions can help you protect your money and make good decisions about where to invest. Some well-documented investment company failures in recent years might have been avoided with proper due diligence. Don’t just focus on the returns reported by the investment manager – there may be a little, ugly monster hiding behind those too-good-to-be-true returns. A little time vetting your potential investment is time well spent.

Click here to view Raul Garcia’s article in Forbes.