As an indispensable part of FactRight’s operational due diligence, one or two FactRight team members sit down with management face-to-face at their corporate headquarters. Others on the review team may join the meeting via Skype. We could easily cover the content of these interviews by phone or by email through written questionnaires (which we may do for follow-up interviews or when we’ve already recently met with management in their offices). However, it is very important to personally meet sponsor executives in their offices, particularly upon the start of a new engagement. One might say this is due diligence 101—we like to get a “feel” for the company culture and people who are considering raising capital in the retail channel.
Onsite visits are the part of our job at FactRight that I personally enjoy the most. For instance, I particularly enjoy meeting with the sponsor’s investment team, learning their investment process and getting a sense for their passion. For large companies, the investment team can be somewhat autonomous; for small companies, executive management and the investment team may be one and the same. Broadly, FactRight’s due diligence as it pertains to investment selection and acquisition centers around these areas:
- Experience, tenure and cohesiveness of the investment team
- Ability to source opportunities
- Underwriting and due diligence capabilities
- Approval process
- Written policies and procedures
- Competitive advantageWhy
Through interviews and document review, FactRight looks to determine if there are any apparent deficiencies in the sponsor’s investment process. Based on its experience, FactRight also determines if there are any strengths that stand out against other similar companies FactRight has conducted due diligence on. It is a fairly straightforward process that has been honed over many years and hundreds of engagements.
What is not as straightforward is getting a “feel” for management. For their own due diligence, I encourage broker dealers and RIAs to meet with sponsor management with an eye towards character, integrity, and passion. In my mind, success should not have to come at the expense of dealing with unprincipled or unprofessional people who may not take their responsibilities to their investors seriously, no matter their investment returns.
Some stories from the road
To underscore why sponsor visits are critical, I have highlighted some of the more extreme onsite experiences from the annals of FactRight. Note that each of these sponsors are either no longer active in the retail space, or achieved very limited traction:
An established company wanting to break into the broker dealer channel. On paper, management had an impressive and long-term track record investing in real estate. The investment team was newly hired but experienced. What became very apparent once onsite was that the CEO was feared by everyone under him, resulting in what might be described as a toxic company culture.
At its core, a marketing firm
An established sponsor looking expand their reach. Onsite, in an impressive conference room, FactRight was treated to one presentation after another from the company’s well-polished marketing personnel. When FactRight asked to speak with the acquisitions team, we learned that the head of acquisitions was hired the day before our arrival. The steak lunch was fantastic.
Pie in the sky
A new sponsor with big plans, whose private placement memorandum and documents outlined departments, personnel and a reasonable investment process. Once onsite, FactRight determined rather quickly that the “departments” and “processes” were not actually in place, yet. But they would be, at some point.
A commercial real estate company bringing a new offering to market. FactRight arrived and as typical, was ushered into a conference room. The management team was introduced. It was about two hours in, when we asked to see offices and meet the rest of the company, that we found out that only the CEO had an office in the building and the other executives were actually consultants, not employees of the firm. FactRight was given a nice tour of a separate company’s office up a few floors where some of the executives were actually employed.
The BS quotient
These examples should impress the importance of an actual onsite visit, particularly with new or relatively new sponsors. Beyond the blatantly obvious items one can pick up during an onsite meeting, interviewing management also gives a sense for the people, their integrity, and the company culture. Some sponsors, particularly those new to the space, can have a tendency to want to tell due diligence professionals what they think they want to hear, or fill them with marketing hype. Without meeting management face to face on their home turf, it is very difficult to determine what we internally call the “BS quotient.”