bfinance Operational Risk Solutions (“ORS”) supports investors in assessing asset managers’ operational risk prior to investing or as part of an ongoing monitoring programme.
New operational pressures
Assessing operational risk has never been more important. Prudent investors can’t afford to be complacent about the potential impact that non-investment risks can have on their portfolios. The growth in exposure to alternative investments, particularly private market strategies, an increasingly complex regulatory environment, and the ever-greater threat posed by cyber criminals means investors’ exposure to non-investment risks continues to evolve and therefore requires specialised knowledge to be appropriately evaluated.
Alongside this, we observe that many institutional investors are now subject to prescriptive guidance on the need to conduct thorough assessments of external asset managers’ operational processes and controls. This is a subject that demands ever-increasing attention.
Comprehensive ODD services
bfinance’s ORS function provides full coverage of the asset class spectrum, evaluating managers’ policies, procedures and resources across key control functions (depicted left). Our Operational Due Diligence ("ODD") approach incorporates a deep and granular assessment of non-investment risks, designed to mitigate an investor’s expose to potentially damaging negative outcomes. Analysis is supported by the use of bespoke due diligence questionnaires, while reporting presents the information that is most pertinent to the specific investor.
We can highly recommend this service to other professionals in manager selection. We were very impressed with the process. The extensive documentation in the final report also provides assurance to the fund's board.
Pension Fund, the Netherlands
Evaluating asset managers
Whilst investors are expected to demonstrate greater awareness of operational risk considerations, the breadth, scope and complexity of the task means that asset owners increasingly leveraging the expertise of external specialist resources. bfinance’s understanding of industry best practice and ability to challenge managers about their control environments allows clients to meet their fiduciary duty to effectively assess and evaluate operational risk. ORS adopts an activist approach by working proactively with managers to resolve areas of weakness by introducing operational improvements.
Key issues to address during ODD include:
We believe that investors should perform a comprehensive ODD assessment on all investments, irrespective of manager size or strategy focus. While the nature and scope of an ODD exercise will vary dependent on the target manager and/or strategy, similar risks and issues exist. The importance of assessing a manager's cyber security control framework is of ever-increasing importance with the threat landscape evolving rapidly and posing challenges for managers irrespective of their asset class focus or maturity. Additionally, we are seeing global regulators increasing their focus on alternative managers with regulatory frameworks becoming more expansive, thereby requiring greater transparency from firms which had historically been subject to fewer disclosure requirements. Further, mandatory ESG disclosure obligations bring new challenges for asset managers across the strategy spectrum.
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