Recommendation revision

LPs are demanding consultants and advisors provide extra due diligence when recommending real estate funds for investments – or face legal challenges if losses are later incurred.

Advisors and consultants to institutional investors in the US are being pressed to spend even more time on their due diligence for fund investments, providing would-be LPs with regular updates on changes in the vehicle right up to the time when a deal is executed.

Unveiling a white paper on the issue, Yuliya Oryol, a partner at law firm Nossaman, and the chief investment officer of the $7.5 billion Los Angeles Water and Power Employees' Retirement Plan, Jeremy Wolfson, said too often consultants would move onto other work once a recommendation for investment had been made. However, there was usually a time lag of three to six – even nine months – between the time a recommendation is made and when a pension system commits the capital.

“These deals – and the markets in which the managers are investing – are constantly changing and pension consultants need to be conducting that due diligence until the investment is actually made. Appropriate and sufficient due diligence is needed at every stage of the investment process,” said Oryol.

One particular issue relates to other LPs in a fund. Wolfson said getting references from other limited partners already in the prospective fund could provide crucial information for a pension system considering a commitment. He also stressed the need for consultants to consistently review terms and conditions that could have been marketed by a fund in better times, and stay with the process through the end.

“Due diligence conducted by consultants only prior to the investment recommendation stage is insufficient without extensive follow-up thereafter, no matter how appropriate the investment recommendation may have been initially,” said Wolfson. The call is part of the increasing shift of LPs towards greater risk management, he added.

Oryol stressed the consequences of not conducting added due diligence could result in “significant monetary losses” for the pensions system, and could push some to consider legal action against consultants in a bid to “recoup some of these losses”.

“If consultants do not conduct extensive due diligence, as part of the financial advisory services offered to their clients, then they fail to provide the type of services needed to help their clients obtain the best possible returns and expose their clients to significant risk,” she added.