Fundraising in the age of ‘desktop diligence’

Due diligence is changing during the pandemic – the question is whether it’s for better or worse.

Fundraising for infrastructure hummed along in the first half of the year, with $56.8 billion of unlisted, closed-ended capital raised, the strongest start since 2008, according to Infrastructure Investor data. But as covid-19 spread throughout the world, one of the first questions raised was what due diligence by email, phone and video – “desktop diligence,” as one GP told us – meant for the fundraising process.

That’s mostly been a whole lot of fumbling with web services, we can all honestly admit.

However, work gone remote has also had an impact on the speed at which due diligence is conducted, US GP and LP sources explained. While a general virtue of virtual due diligence was, at the pandemic’s beginning, believed to be the efficiency of preventing thousands of miles of travel, a recent noticeable change has been the way in which capital is committed.

One adjustment has been the “exacerbation” of the practice of holding “rolling closes”, sources have told us. Instead of waiting for an official close date to allow in a sum of capital collected during a portion of a fundraising period, GPs are increasingly allowing LP capital in as it is available.

“You just take LPs as they come sequentially,” one source said.

While informal “interim” closes have long been in use by investment firms, new virtual due-diligence processes have led to disrupted timelines for commitments. Investors and managers say this hasn’t had a real impact on fee levels and discount offers as of yet, just a shift in how capital is now committed.

“LPs have many different ways of handling due diligence throughout this pandemic,” the head of investor relations at one US-based GP said. The GP explained how a capital commitment that used to require four-to-five in-person meetings now can amount to a months-long conversation stretching across double-digit Zoom calls.

“We haven’t slowed down because of covid,” a source working for a US-based LP told us. “We haven’t sped up because of covid either.”

The LP described a downside to desktop diligence has been a reliance on pre-existing connections in the industry to move potential commitments forward.

“I think it’s very hard if you don’t have an existing relationship,” the LP source continued. “It’s going to take a lot of work to gain trust, share your strategy and show people what your track record is. It’s hard when you don’t have established credibility.”

The impact of this trend could have a constricting effect on capital committed to new and emerging managers, although some, like Ember Infrastructure, have managed to secure anchor commitments during the pandemic.

As the investment landscape settles for however long the pandemic remains, cracks may start to form in how the new way of fundraising is playing out.