Investment Selection Process

05/06/2024

The Investment Selection Process is very important especially in the field of alternative investments. Generally there are thousands of opportunities, projects or hedge funds where it is possible to allocate money.

Honestly, the only thing you can control is a risk. So doing a proper investment selection and due diligence is the key to the successful result. Below is a description of a proper investment selection process from my point of view.


INVESTMENT SELECTION PROCESS:

  1. First screening
    First screening of the investment opportunities is done from several sources such as:
    - Databases
    - Conferences
    - Associations in specific asset classes and industry publications
    - Network
    - Recommendations from the peers in the industry

  2. High-level analysis
    Once the first screening is done then high-level analysis is a next step and it consists of:
    - Calls with the managers
    - Pitch deck check
    - Audit reports check
    - Portfolio match-up check

  3. Due Diligence
    If the high-level analysis went well and the investment opportunity meets the client´s requirements then the most detailed part takes into the place - due diligence process which has the following parts mainly:
    - Key findings report
    - Red flags
    - Personal meetings with the managers and their team
    - Background checks of the managers done by external agencies
    - External analysis done by the 3rd party - experienced advisor in the field of specific asset class and the same location as the investment opportunity is


As you can see the Investment Selection Process is a complex activity and consists of many tasks. Below is an example with more details how the selection process looks like.


EXAMPLE:

First screening as Quantitative analysis:

  • AUM: in the range of USD 50M-750M, i.e. boutique and smaller funds
  • History: minimum of 3 years
  • Track record: annualized performance >12% p.a. for past 3 years
  • Jurisdiction: located in the US, UK or Western Europe only
  • Asset classes: litigation finance, life settlements or catastrophe reinsurance
  • Currency: USD or EUR
  • Liquidity: max. 1 year lock-up with quaterly redemptions


Investment and Operational Due Diligence as Qualitative analysis:

  • Investment process: What is the source of the investments and how they choose the right deals?
  • Sustainability: Is it good market environment so the strategy can deliver the expected results in the upcoming years?
  • Management: Who are the key persons / managers and what is their history?
  • Fairness: Do they have clean criminal record and have no foreclosures?
  • Commitment: How many professionals are in the team and is their reward dependent on results? Do the funders invest their own money to the strategy and what is their allocation?
  • Operations: Have been done any changes in the management recently? How long does the team cooperate together?
  • Recognition: What is the opinion on them from the peers in the same asset class? What is their reputation?
  • Investment philosophy: What is a capacity of the strategy and what will they do once they will reach it?
  • Service providers: Do they have an independent auditor and administrator?


Above stated questions are just examples of a few of them which are used within the Investment Selection Process.


Ongoing Regular Review - Monitoring & Reporting

Once the investment selection process is done then it is very important to do an ongoing regular review of the investment, the managers and monitor their activity.

One of the next posts will focus on this topic.


Remember, Due diligence is an ongoing process, not a one-time event.