Preqin Investor Network: Fund Selection Due Diligence – Experience and Expertise with Fund Strategy

by Laura Duce

  • 16 Jul 2014
  • PE

Preqin Investor Network’s Blog takes a closer look at the industry from the institutional investor’s perspective.

Investment professionals must ensure that they ask the right due diligence questions when undertaking their fund pre-screening process. Placement agents and investment consultants face similar challenges to investors during their own due diligence, and can therefore provide useful insight into the key questions that must be asked.

Placement agents and investment consultants told Preqin Investor Network that one of the key factors that must be considered during due diligence is the fund manager experience and expertise with fund strategy for which it is seeking a mandate. This trait is seen by service providers as an important indication that a fund will achieve its fundraising target; fund managers may struggle to raise sufficient capital without this as investors may be reluctant to invest in a fund applying a strategy in which they see no clear manager expertise. Furthermore, fund manager experience and expertise with particular fund strategy is viewed to provide a good indication that a fund will go on to generate high overall returns.

Analyzing performance track record in isolation without factoring in expertise could be a mistake; investors should look out for strategy drift when considering how relevant a past fund’s performance is for a new fund that may be targeting different markets.  Even if a fund manager or more specifically its investment team has raised successful high performing funds in the past, it does not necessarily indicate that their successor funds will be equally as successful if their fund strategy has significantly changed. A previously successful team with strategy drift may need greater investigation from an investor than a team that maintains consistent investment focus across a fund series.

Take a closer look at the key questions investment professionals should ask during their initial fund screening and due diligence in Preqin Investor Network’s Key Due Diligence Considerations for Private Equity Investors: Fund Selection report, available from 23rd July.

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