If your organization is thinking of making an investment or completing a merger or acquisition, minimizing risk is key. That’s where due diligence come into play.
Investopedia defines due diligence as “an investigation or audit of a potential investment or product to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party.”
One of the simplest ways to engage in due diligence is with a due diligence questionnaire (DDQ). But DDQs must be very thorough for responses to provide your organization with the information needed to decide whether to move forward.
Use the seven examples listed below as a starting point to write effective DDQs that uncover hidden risks and financial pitfalls.
1. Limited partners DDQ
The Institutional Limited Partners Association (ILPA) offers a due diligence questionnaire “compiled from over a dozen sample questionnaires provided by [limited partners], [general partners] and third parties. It has been reviewed by the members of the ILPA Research, Benchmarking & Standards Committee, as well as several industry leaders as part of a six-month, public comment period.”
It covers 14 crucial areas:
- General firm information.
- General fund information.
- Investment strategy.
- Investment process.
- Alignment of interest.
- Market environment.
- Fund terms.
- Firm governance, risk, and compliance.
- Environmental, societal, and governance.
- Track record.
- Accounting, valuation, and reporting.
- Legal and administration.
- Diversity and inclusion.
2. Hedge fund investors DDQ
Managed Funds created a DDQ that “was prepared and published by Managed Funds Association (“MFA”) in consultation with Hedge Fund Members of MFA and outside groups representing Hedge Fund investors. This questionnaire was designed to identify the kinds of questions that a potential investor may wish to consider before investing in a Hedge Fund. In particular, we have tried to identify questions that may help amplify on or provide additional details to the disclosure in a Hedge Fund’s offering documents.”
3. Business relationship DDQ
MISC issued this DDQ to ensure organizations meet its ethical standards. In the intro, they state:
“The MISC Group has a zero tolerance policy against all forms of bribery and corruption. The MISC Code of Conduct and Business Ethics (“CoBE”) and Anti-Bribery and Corruption Policy and Guidelines (“ABC Manual”) … apply throughout the Group and reflect MISC’s commitment to fight any corrupt and unethical practices in the course of conducting our business.
“The due diligence process on client lies at the heart of minimizing MISC’s risk exposure as a result of activities carried out by MISC on clients’ behalf. At minimum, the due diligence exercise on our client is to ensure that the activities performed by MISC on behalf of the client will not breach our own CoBE’s requirements.”
4. Correspondent banking DDQ
The Wolfsberg Group created a correspondent banking DDQ “to set an enhanced and reasonable standard for cross-border and/or other higher risk Correspondent Banking Due Diligence, reducing to a minimum any additional data requirements, as per the Wolfsberg definition and current FATF Guidance. It is also the Group’s expectation that the Group members will begin to use the CBDDQ, in a phased approach, with all of their respondents.”
5. Investor and consultant DDQ
INREV’s DDQ “assists investors and consultants in the due diligence process to understand a fund manager’s structure, strategy and non-listed real estate business. It also gives insight in a specific vehicle’s strategy, risk processes, management, terms and projected performance. With it, investors can determine, in principle, whether a proposal fits their investment objectives.”
6. Environmental, societal, and governance (ESG) DDQ
Invest Europe uses this DDQ to provide “a non-exhaustive list of ESG questions that can be used to assess how far progressed a company is in relation to management of ESG matters. The questionnaire is not supposed to be a tick box exercise. It is there … to identify risks, improvement opportunities and good practices and should be regarded as a tool to facilitate investment and to identify and monitor ongoing ESG concerns.”
7. Infrastructure investment DDQ
Principles for Responsible Investment (PRI) created an infrastructure investment DDQ “to help investors understand and evaluate infrastructure investment managers’ approaches to integrating material environmental, social and governance (ESG) factors into their investment practices, and to understand where responsibility for doing so lies within the investment manager’s organization.”
The DDQ consists of four sections that seek to understand managers’:
- General approach toward responsible investment.
- Responsible investment processes before investing.
- Post-investment responsible investment processes.
- Disclosure practices with regards to their responsible investment processes.
How RFP360 can help
- Create custom Excel-free questionnaires (including drop-down menus).
- Track real-time vendor completion progress.
- Tabulate scores automatically.
- Store and organize all your vendors’ information and documents.
- Track vendors’ responses over time and view a clear history of all interactions.
“Using RFP360 enables a more structured and standardized process,” said Ronni Beckwith, Principal, HR technology consulting practice leader at ihouse. “When using email or spreadsheets, it’s easy to make an exception for vendors.”
Read ihouse’s full case study.