Thoroughly vetting a prospective investment requires looking beyond the numbers and into the managers' history and maintaining ongoing monitoring, according to Ken Springer, president of Corporate Resolutions. "It's not what they tell you, it's what they don't," he told ThinkAdvisor on Thursday.
Corporate Resolutions works with institutional investors like private equity firms, pension funds, fund of funds, family offices and other investors to uncover information that may not be public record or is difficult to find.
"They want to see what's not in the 10-Ks and 10-Qs that they need to know," Springer said. "It's all about can you really trust people?"
He noted that "a lot of the institutional investors didn't get ensnared by Bernie [Madoff] because they had their best practices already in place. People are doing more of that because people have gotten smarter" about due diligence.
Springer founded Corporate Resolutions in 1991 after serving as a special agent investigating fraud and financial crimes for the FBI. He said that when his firm does background checks on management, what they typically find is that they were involved with other businesses that they didn't disclose or indications of other financial stress.
Even if an investment's management team looks good during an initial investigation, he said, its circumstances might change.
"They have financial problems, make other poor investments, sometimes [they get] divorced," Springer said. "Let's say you're investing in a hedge fund and all of a sudden a manger divorces. You're expecting she or he is sitting in front of their Bloomberg machine all day and they're not; they're not focused, they're taking care of the kids or going to divorce court. [Investors] want to know about those things up front."
A manager who recently left a fund should also be investigated to see if it's due to divergence from the strategy, he said.
In addition to investigating instances of material nondisclosure, Springer warned that investors should be cautious of "problematic patterns of lawsuits." Advisors know that an investment's past performance is not a guarantee of future results, but Springer noted that when it comes to those patterns of lawsuits, "past history is often indicative of future performance." He said, "You want to see if everyone that a company does business with sues people or they've been sued for breach of contract or something else."
"If everyone they're doing business with gets sued or sues them, what makes you think you're not going to" be sued as well, he asked.
