RIAs know that due diligence is essential. But when it comes to manager research, they may not realize just how vital it is, and for many, due diligence takes a backseat to menial back-office tasks.
According to data from Burgiss and eVestment, the difference between top- and bottom-quartile managers in private equity is nearly 20 percent per year. That means that if you're not carefully researching who you're investing with, you could miss out on many potential gains. Compare this to public stocks, where the top managers outperform the bottom 25th percentile by just 2.6 percent annually, and it's clear that private equity is a different beast altogether.
But selecting the best managers isn't easy. To make the right decision, you need to deeply understand the market and what each manager brings to the table. This means due diligence is critical.
An analysis by Fundify found that angel investors who made investments after 40 hours of diligence generated an average MOIC (multiple on invested capital) of 7.1x. In contrast, those who invested less than one hour of work made only 0.8x or lost money on average.
Investment firms realize the importance of due diligence and build large in-house research units to support their investment decisions. For instance, BlackRock employs around 300 researchers, while JPMorgan employs around 256.
RIAs seeking to improve their manager selection process can learn from these larger firms by taking a more active role in due diligence. While it may not be possible to replicate the size and sophistication of research teams at BlackRock or JPMorgan, eliminating menial back-office tasks—such as data entry—can free up time for advisors to conduct more in-depth due diligence.
RIAs are stretched thin
As the registered investment adviser community continues to grow and evolve, various responsibilities pull practitioners in different directions.
According to a recent study by Kitces Research, the typical financial advisor spends no more than about 50% of their time on direct client activity-related tasks and barely 20% of their time meeting with clients. In other words, most of the day is spent on menial back-office tasks or other distractions.
This time crunch isn't for lack of trying. RIAs are already stretched for resources, and the average RIA firm has only two employees. As the industry continues to grow, it's becoming increasingly tricky for RIAs to keep up with the demand.
To make matters worse, a separate study from Celent revealed that wealth management firms are set to spend $24 billion on technology annually by 2023. This increased investment is meant to help firms meet the needs of their clients, but it puts even more pressure on RIAs who already feel like they're playing catch-up.
Given all of this, it's no wonder that manager research and due diligence are often pushed to the back burner.
The solution: Gridline
Gridline provides an efficient way for RIAs and family offices to offer their clients high-quality, curated investment opportunities in non-correlated alternative assets. Gridline delivers access to these top-tier funds by leveraging the power of a platform that handles the traditionally cumbersome back-office details — infrastructure, treasury management, performance reporting, tax requirements, and liquidity of the equities — saving valuable time that can be devoted to building their practices instead of vetting and managing hard to access private market opportunities.
This due diligence solution is key for RIAs who want to focus on what they're good at, finding the best managers and generating returns for their clients. With Gridline, you can finally put your back-office distractions aside and get the most out of your private equity investments.