What Does the Post-COVID Future of Operational Due Diligence Look Like?

The COVID-19 global pandemic is changing how business leaders across industries carry out their usual operations. In the U.S., 66% of employees worked from home during the pandemic,¹ with investment managers and operational due diligence (ODD) teams being impacted similarly.

As work-from-home procedures have remained in operation, investment managers and ODD professionals alike have adjusted to virtual due diligence practices and have realized some benefits in the process. Here, we take a look at the evolution of the ODD process throughout the pandemic and where it will go in the future.

Traditionally, ODD reviews have been dependent upon in-person and physical interactions. As was common practice, an ODD review centered around traveling to an investment manager’s office to conduct extensive in-person interviews with employees, analyzing confidential documents onsite, evidencing systems and technology, and touring the manager’s offices to ensure appropriate physical controls existed. Under traditional ODD methods, coordinating meetings and travel had been standard practice that required significant time and budget.

As the global COVID-19 outbreak took hold in Q1 of 2020, and most organizations worldwide activated business continuity plans and work-from-home arrangements, investors were forced to make decisions regarding their ODD needs and their obligatory on-site visits: delay new manager engagements altogether, invest new capital only in managers with whom they’re already engaged (and therefore have completed previous ODD exercises), or approve remote due diligence processes.

For example, the Korean Teacher’s Credit Union Retirement Fund changed their internal rules to forego new due diligence processes by only investing in funds from managers they’ve worked with before.² Also in South Korea, the Public Officials Benefit Association and MG Korean Federation of Community Credit Cooperatives have determined to enable the foregoing of due diligence on a case-by-case basis.³

Others who prefer not to change their ODD requirements may back away from new investment engagements altogether as a result of in-person due diligence challenges. But others chose to forge a new path – remote ODD reviews. As a result of improvements in data management, record digitization and videoconferencing technology, it’s now possible to carry out effective ODD reviews virtually. A survey from the Investment Management Due Diligence Association reinforced such a view as it found that 29% of investment due diligence officers are no longer carrying out reviews in person.⁴

Transitioning away from in-person ODD reviews and toward virtual processes does offer a few enhancements to the process. For example, reducing the pressure of squeezing a multi-hour review into just a one-day onsite meeting, remote ODD allows multiple meetings with key personnel to discuss separate topics over a multi-day time period. This may allow for more detailed and comprehensive interviews since teams aren’t racing to fit a whole review into a few hours. Additionally, a virtual review can also be cost-effective, saving the cost of travel and related expenses.

However, performing ODD remotely isn’t without its challenges. Doing so could make it difficult to evidence certain aspects of an investment firm’s operations, such as understanding how teams work together (particularly if the majority are working remotely), reviewing compliance manuals and policies, or evidencing a live trade demonstration within an order management system. Current screen sharing and videoconferencing technology does allow these tasks to be completed virtually, but an adjustment period is sure to accompany the transition from in-person to virtual. As such, ODD teams and investment managers alike should account for additional time to settle into these virtual meetings.

As it is still new for many, there are a number of steps managers can take when preparing for a remote ODD review. Practitioners should consider the following items ahead of a virtual meeting:

• Alert all internal parties who will take part in the review and note that they are expected to take the meeting via video to improve the communication quality
• Create an agenda that outlines individual meeting times and lists all participants. This may need to be done for multiple meetings if the process is spread over a number of days
• Make a list of all documents needed for review, requesting they are digitized ahead of the review and provided to all attendees for each meeting
• Confirm that screen sharing capability of important processes can be implemented for demonstration, such as trade execution and trade reconciliation
• Ensure communication and verification with service providers remains open and as transparent as has occurred in the past
  
  

As many investment managers, asset allocators, and ODD teams know that remote reviews can be practically implemented, the industry will likely see the practice continue after the pandemic has passed. Some investment managers’ headquarter offices – previously the main location for many ODD reviews – will likely remain empty or have a reduced footprint as managers realize the potential cost and efficiency savings of remote work.

A recent Deloitte report predicted that the average cost per in-person employee will increase 40% to 50% to comply with health measures in the aftermath of COVID.⁵ In fact, some managers may forego a traditional office altogether, where offices may consist simply of shared meeting spaces or include space for critical in-person staff only, potentially allowing a number of operational processes to also exist remotely.

While the future of the traditional office remains to be seen, some investors and managers are already embracing remote ODD practices permanently. For example, Meketa Investment Group, which oversees $1.5 trillion in client assets, recently announced plans to implement its due diligence reviews as fully remote.⁶

While the current business environment has been significantly impacted as a result of the global pandemic, many investment operations had been prepared for temporary business continuity scenarios, appropriately shifting operations to continue in short-term virtual environments.

However, as long-term business continuity plans and perpetual remote work may become the norm, the evolution and adoption of a smaller physical office and a larger virtual office appears to be a reality for many organizations. Investment managers and due diligence professionals will need to adapt as new investment opportunities arise, but the demand for thorough ODD analysis will remain, requiring an evaluation and consideration of the longstanding practices surrounding traditional ODD reviews.

¹ Clutch, Working From Home During the Coronavirus Pandemic: The State of Remote Work, April 16, 2020.
² Korean Investors, “Korean pension funds relax due diligence to restart alternative investment”, July 17, 2020.
³ Ibid
⁴ Pensions & Investments, “Virus concerns prompt some asset owners to halt in-person due diligence”, March 6, 2020.
⁵ Ignites, “Some Offices Are Reopening, But Will Anyone Return?”, July 13, 2020.
⁶ FundFire, “Meketa Going 'Fully Remote' on Manager Due Diligence”, July 21, 2020.