PRINT THIS PAGE My pension fund has been investing via a fund of funds for a few years. We're now looking to make our own fund investments, but the due diligence seems endless. What should we really be looking at?
11/12/2001. Source:Golding Capital Partners. Jeremy Golding
 From Jeremy Golding, Golding Capital Partners: You should be able to get some advice from the fund of funds you have been investing with. However, you can follow a structured approach that takes into consideration the past, present and future of the funds that you are looking at.
First of all, you should ensure that you carry out your due diligence according to a clearly defined process. The diagram below shows the way that we conduct ours. You may not be looking at as many funds, but it's a useful model to take as a starting point.
The important thing to stress here is that at the end of each stage, you must have a decision. For example, once you have viewed the preliminary information, you should weed out a large section of funds - that could be because they do not fit your strategy, or the team does not have the right experience or whatever. The point is that you need to ask the question at each stage: is it worth spending any more of your scarce time and resource on this fund? If not, then it shouldn't go through to the next stage.
Once you have reached the due diligence stage, you should ensure that you are looking at present and future as well as past. Many people focus on track records. Indeed, many teams focus on their track records, and pretty much all funds will tell you that they are top quartile. But often, you find that if you take out, say, one mega-deal the picture starts to look rather different.
The team is an extremely important factor in the success of a private equity fund investment - much more so than in other asset classes, and yet it's the hardest thing to evaluate. The main point to consider is whether you actually have faith in the team. Do you believe in it? Do you think it can implement its stated strategy over the next five years and onwards? This isn't something that you can gauge from getting them to complete a two-page questionnaire. You couldn't even get this from a 200-page questionnaire. You need to get to know the teams.
Other areas to check in the team are what individual team members' track records are like and who gets a share of carried interest - you don't want the team breaking up after a couple of years because some members feel that they could make more money by spinning off.
Extensive due diligence is critical (and time-consuming), but only by really getting to know the team will you get beyond the slick presentation. You need to find the flaws and if these are not properly addressed, it's unlikely to be worth investing in the fund. And never rely on other investors' due diligence. Many young teams often produce lists of well known investors who have signed up, but if you dig slightly deeper, you may well find that these investors have reasons for investing that are not strictly financial - they may be in it for strategic reasons or for co-investment opportunities. Or, worse still, they have not done their due diligence at all.
Jeremy Golding is managing director of Golding Capital Partners, an independent fund of funds investment manager and advisor, focused on private equity and venture capital. We offer our clients and investors access to leading private equity and venture capital partnerships through a variety of products and services ranging from investment management to advisory and consulting. For more information, please call +49 89 419 997-0, e-mail info@goldingcapital.com, or visit www.goldingcapital.com
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