Beyond the Black Box of Alternatives

The Importance of Continuous Oversight and Monitoring of Alternative Investments

By Steve Ogrin - January 31, 2024

RIAs, Is Your Continuous Oversight and Monitoring Process Even Remotely Adequate?

Congratulations, you’ve just completed the process of recommending an alternative investment! You’ve scrubbed the data room, read through and absorbed the third-party due diligence report, interviewed the program sponsor and even possibly visited the asset, and after weeks, or even months, of checking off the various aspects of your process, the investment has been made. Gold star for you, but what now?

Most RIAs will acknowledge that continuous oversight and monitoring of the investor account and the investments in that account are imperative as a fiduciary. A fastidious RIA will be paying close attention to changes in management personnel and the overall standing of management (i.e., background checks), equity raise and deployment, style drift, distribution and redemption activity, financial performance, status of insurance and tax payments, debt environment…and on and on and on. You get the point…there’s a lot to be informed on.
                                                                                           
For those of you squirming a bit right now as you realize that your oversight and monitoring process is, at best, touching on a fraction of the topics listed above, fear not, you’re not alone. The reality is that one of the more perplexing aspects of the alternative investment process, especially for private offerings, is that once the investment has been made the due diligence and oversight process metaphorically packs up and goes home. Despite many of these investments having a 3, 5, even 10-year hold, for most of the hold period the RIA is often left on their own, scrounging for scraps of information. These scraps may take the form of a smattering of pedestrian data points from a fintech platform or possibly a semi-annual one-pager released by the sponsor. I suppose if the RIA takes 147 steps in the opposite direction, squints hard enough and tilts their head to the left, the consumption of these scraps may constitute adequate continuous oversight and monitoring (*cough* *cough*…it doesn’t).

For public programs we have the opposite problem. The need to thoroughly read and understand every 10-K, 10-Q and 8-K filed - for each investment - presents such an overwhelming task for most RIAs that they either hire an analyst dedicated solely to the consumption of these amazing page-turners, or they simply shut down the advisory practice for the week so they can huddle in a dark corner of their basement reading filings and wondering where they went wrong in life. Neither option is very palatable for most and the net effect is that many end up with an oversight and monitoring process that is inadequate, or worse, they simply avoid alternative investments altogether.                   
                                                                                                                    

So if the RIA is caught between eating scraps (private program) or drinking from a fire hose (public program), what are they to do? First off, for the avoidance of doubt, in many situations an inadequate oversight and monitoring program is not the fault of the RIA…it’s a systemic problem! For decades the process of investing in alternatives has been to do a bang-up job evaluating and conducting due diligence pre-investment, but then post-investment the RIA often spends the next 5-10 years clutching the proverbial pearls and relying on the sponsor alone to tell them that everything was going to be ok. The process was simply not built for post investment oversight and monitoring. And when I say “not built” I am of course referring to a problem of dollars. The RIA often doesn’t have the margins to hire a full-time alts analyst or the internal capacity to conduct thorough ongoing due diligence on all their alts investments, and the program sponsors traditionally have not faced RIA pressure to provide for ongoing support through a third party (like they do with pre-investment due diligence reports) on an ongoing basis. Prior to the 2023 launch of Buttonwood Due Diligence’s Alternative Investment Monitoring (AIM) program, there simply weren’t realistic options for the RIA to efficiently conduct oversight and monitoring of their investments.

So how should the RIA address this problem without throwing a bunch of money at it, or resigning themselves to a life of conducting ongoing due diligence? One solution is to utilize third party support such as the aforementioned BW AIM program, while another option being utilized by some RIAs is to realize efficiencies through a collective due diligence review process. These collective due diligence efforts are designed to provide the RIA with thorough initial and ongoing due diligence on alternative investments - a must have for RIA oversight and monitoring - while spreading the effort across a consortium of RIAs. While each RIA needs to have their own due diligence process that meets the needs of their firm, there is no need for each element of that process to be unique, opening the door to collective consumption of centrally-prepared due diligence and monitoring. One such example of a collective effort is Buttonwood Due Diligence’s Centurion, a consortium of RIAs currently being built for the purpose of providing education, due diligence and investment monitoring support to member RIAs that relies on the concept of centrally-prepared due diligence.

The solution here will be an individual decision for RIAs; throw money at the problem, develop a vitamin D deficiency sitting in the basement conducting due diligence and monitoring, or utilize a third party effort like Buttonwood's AIM or Centurion program. What’s most important is that you have a robust continuous oversight and monitoring process in place.

                                                                                           
If you'd like to learn more about Buttonwood or our services, including our full due diligence sponsor and program reviews, sponsor qualifications, representative testing, the BW AIM program or the Buttonwood Centurion, please reach out. We offer a full suite of customizable due diligence products.