The Due Diligence is an exhaustive process of research and analysis that is carried out before making important decisions. It is a necessary evaluation procedure to understand the risks, opportunities and real value of an investment.

For alternative assets, perform due diligence rigorous due diligence is essential to make informed decisions and protect investors' capital.

This goes beyond the numbers: it helps to identify financial and operational, but also legal and commercial risks. This, in order to achieve a complete view of the business, being important to include quantitative and qualitative analysis, each crucial to the potential of the investment and its risks.

Broadly speaking, these are defined as follows:

1. QuantitativeFocuses on evaluating essential financial data and metrics, such as historical performance, cash flow and financial ratios. However, relying on numbers alone may not be sufficient.
2. QualitativeQualitative: Examines intangible factors, such as organizational culture, team competence and experience, as well as ESG factors. This approach provides a more complete perspective and allows assessing long-term viability and sustainability.

Which is more important?

If we review a survey conducted by Chartered Alternative Investment Analyst Association -CAIA- a few years ago to investors and managers, 96% of respondents say that qualitative due diligence is equally or more important than quantitative and operational due diligence, highlighting factors such as face-to-face meetings, firm culture and organizational structure.

Now, as we can see in the survey graph, this depends on the asset class that is being addressed. In the case of equity traditional equity, greater weight is given to the quantitative aspect, whereas in Private Equity, Real Estate or Venture Capital, the weight of the quantitative aspect is less than 20%.

Among the points that should be addressed in a process of this type are the following:

• Governance and Transparency.What is the corporate structure and how is decision making? Are there policies to manage conflicts of interest?
• Team Experience and ContinuityWhat is the team's track record and experience in managing similar funds?
• Investment Evaluation and Selection ProcessesWhat criteria and methods does the investment committee use to evaluate risks and opportunities?
• Fee Structure and Alignment of Interests.How are fees and interest structured? What percentage of the principal does the manager contribute to the investment?
• Commitment to ESG.How does the firm integrate environmental, social and governance factors into its investment strategy?

The due diligence allows us to identify red flags or red flags to which we should be attentive, such as, for example:

• High equipment turnover. This may be a sign of internal problems and lack of stability.
• Lack of transparency. It is indicative of possible management problems or, in the worst case, fraud.
• Abrupt changes in investment strategy .. Often reflect lack of clarity in the direction and objectives of the company.
• Non-compliance with ESG regulations. May affect both reputation and long-term investment performance.

Therefore, at the time of performing a good due diligence due diligenceIt is therefore necessary to approach it from different angles, in order to mitigate risks and maximize returns. Even using additional tools, such as the questionnaires of the Institutional Limited Partners Association -ILPA- questionnaires, which provide a guide to act in a process of this nature.

José Pedro Márquez

Senior Portfolio Manager Real Estate AGF Fynsa