What to ask in your due diligence questionnaire

Posted by Andrew Borowiec on Jan 3, 2018 7:57:00 AM

What to ask in your questionnaire

What are the essential areas to investigate in a due diligence questionnaire? What questions must you ask? How do you decide what to ask and what to leave out? We have some great data to indicate where your most critical areas of focus should be, plus advice from and operational due diligence expert on making those tough calls on what to include or leave out.

Where our due diligence questionnaire data comes from

When we were compiling the content for our definitive CDDA qualification, we undertook a rigorous content verification process that included a practice analysis survey.

The survey was completed in full by over 200 practitioners and consulted them on the relative importance of a whole host of potential course topics. In the section on operational due diligence, we quizzed respondents on relative importance of different operational due diligence practices.

Below we’ll share the areas considered most important by our panel and we also invite you to explore the survey results in more detail by downloading your own full copy.

How important is your due diligence questionnaire?

The due diligence questionnaire was considered the single most important source of information for an operational due diligence practitioner to collect, review and verify. This is backed up when we look at the views of experienced ODD professionals like Kevin Eastwood, CDDA, Operational Due Diligence Manager at the UK Pension Protection Fund.

He says that your due diligence questionnaire is the foundation of the whole project, because it is only by filling it in that you can identify the potential gaps or risk areas that require further investigation.

What you have to ask in your due diligence questionnaire

It wouldn’t be right or helpful to provide a list of specific questions you have to ask on every due diligence project. Every investment opportunity is different so you’ll want to tailor your questionnaire to the opportunity in front of you to ensure you’re asking the right questions without asking all the questions (which is another great piece of advice from Kevin Eastwood!)

We have selected the most important elements as stated by our panel of respondents, citing only those that received a higher than 80% rating according to our scale of relative importance.

  • Operational processes:
    The 3 most important operational processes that should be observed and evaluated, beginning in your due diligence questionnaire are (in order of importance) cash management flows and controls, valuation and fund accounting.
  • Investment management firm:
    When looking at the investment management firm itself, the two most critical factors were firstly the governance of that firm and secondly the ownership.
  • Team members, roles & expertise:
    The two most relevant areas of investigation here were thought to be the team structure, coverage and responsibilities and then subsequently the team evolution and turnover.
  • Third party service providers and counterparties:
    There was only one topic that scored above 80% in this are and that was counterparty risk management.
  • Compliance programme & regulatory environment:
    Regulatory examinations and actions was the only topic within this area to qualify as a “must include” as per our 80% criteria.
  • Technology infrastructure:
    After a paucity of qualifying topics in the previous areas, technology infrastructure offered up three qualifying topics; business continuity and disaster recovery was the most important area, closely followed by IT infrastructure and cyber security.

How to decide what to ask and what not to

If we stick by the sound advice of Kevin Eastwood, to get a good result, we should avoid asking 3000 questions to the fund manager  in our due diligence questionnaire. The problem with this approach is that it requires operational due diligence professionals to be confident enough to leave things out. Here’s one approach that may help you get the perspective you need to make those big decisions.

Your due diligence questionnaire is without doubt one of the most, if not the most important bit of documentation in your investigation. But it is far from the only source of information you have available to you, even at the start of the project.

Investigating, collecting and thoroughly evaluating all publicly available documentation before you start drafting your questionnaire can often provide helpful context and signal areas where you don’t need to ask further questions as you have already been able to cover them through your research.

Find out more about what your peers think is most important to know and do, plus how often they actually do them. Download the full survey report here and get the full picture on what you might want to include in your due diligence questionnaires.

Download the Due Diligence Survey Report


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Tags: Article, Due Diligence, Hedge Funds, Private Equity

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