The process of Fund Evaluation / Evaluation Points
We have been constructing our own fund evaluation process since 1996. In our process, the evaluation starts from gathering information of funds and managers and conducting multilateral analysis of such information to set up hypotheses on why the fund is well or poorly managed. Then, we test those hypotheses through on-site due diligence including management and other professional interviews.
Fund Evaluation Approach
Most of the evaluation items are common for all the funds’, regardless of their investment universe and strategies. However, keeping evaluation points for long-only investment strategies for traditional assets, such as stocks and bonds, as standard, additional evaluation items are reviewed for private market investments, such as private equities, real estate and infrastructure, and alternative investment strategies, such as hedge funds, to address nature of fund’s investment universe and strategies.
There are 3 categories in evaluation points to be reviewed for traditional investment assets and strategies.
As for hedge funds, evaluation points can also be grouped into the same 3 categories.
In addition, operational due diligence is conducted in order to assess operational risks leading to fund’s breakdowns, such as concealment of investment failures, fraud accounting, and auditors’ inability to access evidences of such wrong-doings. Operational due diligence may result in classifying the fund as “Unqualified for Investment” depending on the nature of its findings.
As for private market investments, while large emphasis is maintained on the evaluation points in the same 3 categories (investment platform, investment process and disclosure), the terms in the investment agreement between managers and investors are intensively reviewed since the terms are unique to each agreement.
In addition, operational due diligence is also critical for private market investments. Investment time horizon is generally longer in private market investments. Longer duration of the agreement and managers’ fiduciary duty magnifies difference in robustness of operational capabilities of managers. Based on our experience with hedge funds, similar process and methodologies are used in operational due diligence for private market investments, which may also result in “Unqualified” rating.
(*)Private Equity Principles released by ILPA (Institutional Limited Partners Association), which consists of three guiding principles, 1.Alignment of Interest, 2.Governance, 3.Transparency