Regular readers of PE Manager know that as of late we’ve been hammering home the point that back office inspections are set to rise. Yes from regulators, but more importantly from investors themselves.
The last time we touched on the subject a third-party audit was suggested for GPs looking to wow investors (of course that advice assumes an independent review would have good things to say about the quality of the firm’s internal controls). But not mentioned was what happens after the tour of the back office is all said and done. Does everyone just go home happy knowing some level of operational due diligence was completed? Not really, say market sources.
In one respect any LP conducting some type of back office inspection is a step ahead of industry standards. And any GP willing to cooperate (with a cordial smile) in that kind of scrutiny is sure to win marks. But many LPs say the process shouldn’t end there: a follow-up phone call, email, informal lunch (something!) would go miles in demonstrating their concerns were not only heard but were being addressed.
What’s more is a CFO or COO proactively engaging investors about the firm’s internal controls can gain a glimpse into how other firms are handling LPs’ questions and concerns. Perhaps as an afterthought it seemed a LP was underwhelmed when it was explained how wire transfers were handled. Why not then casually ask for their thoughts on how they have seen their other GPs clear cash? An LP sharing their inspection experiences may want to reveal the red flags they’ve spotted, and vice versa, what practices made them confident their money was entrusted in good hands.
At the same time it should be acknowledged those professionals responsible for handling firms’ back office functions are incredibly time strapped. But by engaging LPs on operational due diligence it should become more obvious how to effectively manage the inspection process. As investors gain a greater handle on what questions they want to ask, and who they want to speak to, GPs should be prepared to meet their expectations. That becomes a lot harder when the two parties aren’t communicating on the inspection process after it ends.