Operations Due Diligence Effectiveness - Survey Report
presented by Convergence, Inc.
February 2020
2020 Annual Institutional Investor

Operations Due Diligence Effectiveness Survey - 2019
Survey Introduction and Background

Convergence is pleased to present the annual results of our 2019 survey focused on Operations Due Diligence (ODD) practices and processes with respect to investment allocations by institutional investors to alternative assets. Survey participants include a cross section of institutional investors with respect to type of investor (e.g. funds of funds, pensions, endowments, etc.), amount and number of investment allocations to external managers and the amount of new annual allocations to external managers.

Convergence appreciates the participation from all respondents. Convergence also appreciates the assistance of several industry practitioners who helped with the design and distribution of this study. With the increasing regulatory focus and business complexity of alternative asset managers, investors have been allocating greater resources to ODD prior to making an investment allocation decision and then on an ongoing basis once that investment allocation has been made.

The report includes 1 - this introduction and background; 2 - an executive summary of highlights and findings compared to the prior year survey and from each section of the 2019 survey, which includes key data points derived from the overall results; and 3 - observations and conclusions by Convergence based on survey results.

The appendix to this survey includes a more descriptive summary of highlights and findings from each section of the survey, along with the response results of each survey question.

This 2019 survey was designed to identify relevant trends, best practices and a view on Operating Risk.

About Convergence, Inc.

Convergence has developed a data, analytics and surveillance platform that provides transparency and easily accessible information relating to the business operations and infrastructure of alternative asset managers. Convergence products include technology-based tools used to facilitate manager and industry research, analytics and surveillance across the universe of registered investment advisors, including assessment of their operating and business risk profile, comparisons to peers and competitors, and analyses of their service providers. The Company's platform includes dynamic data and analytics on 35,000+ Advisors and over 150,000 funds. Also included is the industry's ecosystem of 6,000 service providers. The platform includes 4000+ data points from regulatory filings, news sources and a significant amount of derived analytics and proprietary original content – most notably Advisor operating model Risk Ratings and Complexity.

Institutional investors use the Company's products to research advisors and their business model with a focus on OPERATIONAL, COMPLIANCE, VENDOR and REGULATORY EVENT RISK prior to and throughout investment allocation. Convergence products benefit institutional investors focused on employing a dynamic, data-based on-going process of manager and advisor surveillance.

Please visit us at www.convergenceinc.com, or contact George Evans for additional inquiries or questions pertaining to Convergence, its products, or this ODD survey.

Executive Summary of Findings – Comparison of Survey Results

Respondance Profile

• A good mix of Public-Private Pension Plans, Endowments, Foundations, FOF, and OCIO respondents.
• The number of Advisors with allocations in 2019 was 67% with more than 100 Advisors and in 2018 was 60% with more than 100 Advisors.
• Bulk of respondents allocate over 15B and add 6-10 Advisors a year.
• Private Equity investing is outpacing Hedge fund investing.

Organzation and Infrastructure

• 75% of ODD teams continue to be in house and 25% a hybrid of in/outsourced. The inhouse number is slightly higher than 2018.
• The majority of current staffing levels in ODD were 0-3 fte in 2019. The overall number of 1 to 5 is increasing over the last 2 years.
• The primary skill sets of ODD professionals continue to be Accounting/Finance and Investment Operations.
• ODD staff time was primarily focused on Valuation Practices and Compliance. Very consistent with 2018.

The Onboarding Process

• Over 50% of ODD teams require an Advisor to complete an annual questionnaire – very consistent with 2018 findings.
• Regulatory data, Media Market News, Background check data and Advisor Peer Data led the pack of data sets collected independent of the Advisor in 2019, also very consistent with 2018 findings.
• Respondents were split 50/50 relative to benchmarking Advisors to their peers in 2018. This increased in 2019. When benchmarking, top areas included complexity of the manager's business model, manager service providers/vendors, the assessment of staff and their qualifications, technology and control policies.
• More than 50% of respondents had formal policies and procedures in place to standardize a view on Operating Risk. This was up from less than 50% in 2018.

Odd Monitoring Process

• 80% of respondents noted that Workflow was an important tool in their ODD model in 2019 compared to 60% in 2018.
• Material change subject matter was highest with C Suite Changes, Qualified Audits, Vendor concentration/changes, Regulatory headline, Negative News and Compliance Jurisdictions.
• Daily notification of Advisor Material changes was the preferred frequency.
• Additional ODD monitoring services of respondents relied on Regulatory Filings and News Media and supported a Daily News page on Advisors for material changes and alerts.

Odd Governance, Decision Making and Competitive Advantage

• All participants overwhelmingly report that their organization views ODD as a value adding activity; ODD helps improve returns and manage risk.
• Most respondents supported 'scoring' an Advisors regulatory filings as an additional input to a culture of compliance at the Advisor.
• Respondents noted that the 2 areas that have the highest impact on Advisor Operating Risk were the Investment Process and the Regulatory environment.
• There was significant upside amongst respondents to employ more technology and data analytics to oversee Risk at the Advisor. Prevalent considerations were cost, better monitoring of risk and the ability to rate the Advisor infrastructure.

Observations and Conclusions

Convergence Observations

• Given continued regulatory focus, and increasing manager operating complexity, investors should refresh their evaluation of the level of resources (staff and/or technology) dedicated to Operations Due Diligence, as well as their own current written policies and documentation requirements from managers. We note that current manager and new manager allocations remain steady versus 2018 and that dedicated resources (people and technology) have increased. Toolsets provided by Convergence lend themselves to complimenting small to medium sized ODD teams challenged by capacity and bandwidth.
• Investors should consider reviewing their level of focus and current processes for evaluating NON-INVESTMENT RISK. Given the growth of Private Equity managers, this will continue to stretch ODD teams. Service Provider 'best fit', the Filing accuracy/culture of Compliance and Regulatory Event Risk are also key considerations.
• With the considerable increase in new products and new avenues for product distribution by managers, investors should re-evaluate those data points, metrics and sources of information for assessing manager operational complexity and Non-Investment risk. Consideration should be given to appropriate weighting of risk areas for "scoring" purposes, and scoring processes should be considered by those not presently doing such as part of their ODD process. Complexity and Risk profiling is paramount to active management of an Advisor.
• Although 100% of respondents indicate their organization views ODD as a "value adding" activity that can improve returns and manage portfolio risk, we are concerned that this area is one in which investors may slowly continue to build resources, processes and technology. Investors should consider a complete review of dedicated resources and toolsets in the marketplace for varied aspects of initial ODD and ODD monitoring, and make spending decisions consistent with their assessment of risk across their portfolio, recognizing that manager Non-Investment risk profiles are in constant change.

Selected Survey Questions with Tabulated Response Data

Q31: Please rank the following list of factors that you believe have the most significant impact on a manager's operating risk (1 = highest risk)?

• Factor | Rank 1 | Rank 2 | Rank 3 | Rank 4 | Rank 5 | Score
• The manager's investment process | 30% | 0% | 20% | 40% | 10% | 3
• The manager's regulatory environment | 9% | 36% | 27% | 27% | 0% | 3.3
• The manager's service providers | 10% | 30% | 40% | 20% | 0% | 3.3
• The manager's non-investment staff (quality and quantity) | 45% | 27% | 18% | 9% | 0% | 4.1
• Other | 20% | 0% | 0% | 0% | 80% | 1.8

Q33: In your consideration of technology and/or data analytic tools to augment your ODD processes, what would be your highest priority areas of focus in making that decision? (ranked by priority, 1 = highest priority)

• Priority Area | Rank 1 | Rank 2 | Rank 3 | Rank 4 | Rank 5 | Score
• Cost savings and/or the ability for additional capacity in your ODD operation | 50% | 10% | 20% | 20% | 0% | 3.9
• Ability to view and/or monitor trends and changes in the infrastructure and operating risk profile of managers | 20% | 30% | 30% | 10% | 10% | 3.4
• Ability to "score" or "rate" the infrastructure and operating risk profile of managers | 18% | 18% | 27% | 36% | 0% | 3.2
• Ability to compare and contrast the infrastructure and operating risk profile of manager allocations across our portfolio | 0% | 45% | 18% | 27% | 9% | 3
• Other | 33% | 0% | 0% | 0% | 66% | 2.3