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French (Canada) - UK Corporate Pension Fund
- Q4 2023
- Global Real Estate
- Commingled funds
- Ongoing ODD monitoring of 7 fund investments
- Operational due diligence ("ODD")
Our specialist says:
Investment strategies in distressed assets/dislocated markets – relevant in this case – do typically bring greater risk of bad headlines and controversy than more traditional strategies. We were glad to be able to support this large pension client in maintaining confidence in one of their key asset manager partners, while also highlighting some important areas to address and monitor, via a thorough and strategy-specific ODD process.
Client-Specific Concerns
A large UK corporate pension scheme appointed bfinance to conduct a deep dive ODD assessment of one of its long-standing asset manager relationships due to escalating concerns, including negative press headlines regarding that manager’s activities.
This investor is required to monitor manager relationships on at least a biennial basis to satisfy its internal risk governance standards but felt that external support from bfinance would be helpful in this instance.
The scope of the assignment included multiple vintages of two strategies, encompassing seven fund investments in total.
Outcome
- Considering operational complexity with two related parties: Having scrutinised the manager’s regulatory filings, the ORS team noted that the funds’ investment objectives could be materially impacted if the firm could no longer use the services of its ‘related party’ entity. This is considered a low-probability scenario, but one warranting continued monitoring of regulatory filings.
- Revealing outstanding regulatory/legal processes. A thorough documentation request produced disclosures of historic and/or pending regulatory investigations and litigation claims. While many of these matters had been resolved, certain claims were still pending. This can be monitored an ongoing basis.
- Highlighting fee schedules. The manager was found to use a modified ‘American’ waterfall schedule (the firm receives carried interest prior to each fund’s investors receiving all of their invested capital and preferred return). bfinance noted that a ‘European’ distribution waterfall schedule may be preferable for investors (the manager only receives carried interest after investors have received a full return of contributed capital and the fund’s preferred return).
- Addressing valuation processes. The assets in the relevant funds are not subject to periodic valuation by an independent agent. The firm had recently appointed a well-established agent to value assets in certain funds, but not the ones included in this review. Conversations with the manager confirmed that there were no immediate plans to bring them into scope.
- Underpinning confidence: With bfinance’s thorough analysis, the investor’s team was able to confirm a sufficient level of confidence in the asset manager and the level of operational risk posed by the relationship. They continue to view the firm as a key strategic partner.
