Best Practices for Investing in Due Diligence Software
When it comes to investments, due diligence is crucial because it enables potential investors to investigate these complex investments and assess their operational infrastructure. They can also better understand their risk exposure and act appropriately to maximize their returns from the investment.
Unfortunately, due diligence can be a resource-hungry and time-consuming process with old-fashioned, manual methods and spreadsheet-based tools. These older methods make it harder to gather and analyze all data for due diligence, coordinate with multiple stakeholders and meet due diligence questionnaire (DDQ) and request for information (RFI) demands.
Since taking shortcuts during due diligence is not an option, due diligence professionals need an easier way to simplify the process, minimize risk, and maximize investor returns. Here’s where automated due diligence technology comes in.
This article explores how consultants and investors can benefit from automated due diligence technology.
What is Operational Due Diligence?
Operational Due Diligence (ODD) is sometimes used synonymously with financial due diligence, although the two concepts are different. Financial Due Diligence is about looking back at a fund’s past performance to assess where it stands today. ODD is a forward-looking, investor-initiated process that enables the investor to evaluate the operational infrastructure of an investment and manager.
The goal is to detect any operational risks that may have a negative impact on investors’ returns. Investors can act early to mitigate these risks before investing by conducting ODD.
What is Due Diligence Technology?
Due diligence technology provides a high level of automation to speed up many due diligence tasks and minimize the need for manual inputs. It dramatically improves manual processes and allows users to de-risk the investment road map, as well as meet new due diligence and reporting demands.
An integrated Due Diligence Platform automates DDQ (due diligence questionnaires) and RFI (request for information) workflows, streamlines issue management, and supports due diligence program scalability.
Thus, practitioners can save time and speed up due diligence outcomes. These tools provide a single, centralized document repository and real-time data to provide a single source of truth essential for multi-party, collaborative due diligence processes.
The Challenges of Manual Due Diligence
Typically, due diligence professionals face several challenges during the due diligence process:
To comprehensively appraise a fund’s operational infrastructure, due diligence professionals need to gather and analyze substantial amounts of information and relevant documents. These documents include:
- Marketing presentations
- Regulatory filings
- Audited financial statements
- Operational policies
- Offering Memorandums
Due diligence team members also need to understand the implications of all this information and ensure it remains accessible to all relevant stakeholders. But this is hard to do if they have to search through multiple folders, Excel spreadsheets, Word documents, or PDF files. Further, sharing information via email makes it difficult to trace information or get real-time data.
These issues affect user productivity, introduce errors, and ultimately hinder due diligence efficiency.
Legacy due diligence methods hinder collaboration between multiple parties. Without automation, version control, and centralized data repositories, users find it hard to share data and get visibility into due diligence activities, issues, and resolutions.
These problems also slow down due diligence and create confusion, affecting risk management and the quality of decision-making.
During the due diligence process, teams require timely, updated information to ensure that they can respond appropriately. But with manual methods, they can only get this information by taking device screenshots or going through masses of emails.
Often, they have to review hundreds of documents stored in different locations and many different formats. This effort is time-consuming, creates confusion, and prevents teams from getting the necessary information to pass the audit successfully.
The Benefits of Due Diligence Technology
An integrated, cloud-based Due Diligence Platform quickly eliminates the challenges highlighted above. For years, investors relied on manual processes, email, and spreadsheets for due diligence, making the process time-consuming, resource-intensive, and error-prone.
There’s no need to wade through a mountain of confusing documents, emails, or communication channels with due diligence technology. Instead, due diligence practitioners can leverage digitization and automation to effortlessly collaborate with others.
They can easily access the needed information to quickly conduct due diligence with centralized document repositories, libraries, customizable templates, and pre-populated questionnaires. These features also provide a single source of truth so that everyone is on the same page.
With due diligence technology, teams can:
- Automate and accelerate DDQ and RFI workflows
- Preview contents without opening them to save time
- Automate email flow by tagging and uploading emails with key metadata
- Improve risk scoring and see changes to risk thresholds
They can also prepare for audits, track compliance with detailed analytics, and eliminate the risk of error in reporting and data entry.
The Key Features to Look For in Due Diligence Software
Adequate due diligence is much more than a tick-the-box exercise. It requires lots of information, detailed analyses, and effective collaboration. Due diligence practitioners need an easy way to collect data, organize documents, and speed up DDQ and RFI processes. Automated due diligence software can help them achieve these objectives.
It should include dynamic dashboards, question-level benchmarking, and enhanced time series analytics to improve due diligence effectiveness and output quality. Further, it should have a frequently-updated document library so users can manage frequent uploads and maintain version control.
The due diligence software solution should be customizable so practitioners can add new fields, entities, or layouts as required. A customizable database should provide a single location for all funds and manager information. Plus, it should provide an intuitive interface and a centralized document repository, allowing users to get relevant information quickly.
A cloud-based, mobile-ready due diligence platform is very useful for remote teams. It also provides a single source of truth with centralized files, real-time data, version control functionality, audit trails, and document classification.
Due diligence software buyers should look for due diligence tools that also include these crucial features:
- Industry-standards DDQ templates from AIMA, ILPA, etc.
- Fully configurable industrial rules and workflow engine
- Automatic report generation
- Real-time analytics to support deep benchmarking across managers, DDQs, time series, etc.
- Support for Enterprise Risk Management, KPI analyses, and quality controls
A due diligence tool with these features eliminates spreadsheet-based DDQ, email communications, and manual portfolio analytics. It thus streamlines the due diligence process, improves collaboration, and enhances investment decision-making.
Introducing DD360 from CENTRL
One key due diligence trend we foresee for 2022 is the increased adoption of due diligence technology platforms. There are many good reasons for this, as we have already seen.
CENTRL is leading the way with its cutting-edge due diligence automation platform – DD360. This multi-party tool provides an intuitive data collection and document management system. Due diligence practitioners and hedge fund or private equity investors can access all information, schedules, and assignments from one centralized library. They can also collaborate internally and with clients, delegate DDQ sections, and automatically generate reports.
DD360 offers advanced automation, document digitization, analytics, and cloud-based operation to simplify due diligence for investors, fund managers, and due diligence practitioners. It automates DDQ and RFI workflows, provides audit trails, and eliminates the need for email communication and multi-format documentation.
DD360 can increase the efficiency of due diligence workflows by 50% or more and deliver average cost savings of 30-40%.
To see DD360 in action, book a demo.