Virtual data rooms (VDR) have been a common way of sharing data between investors and investment managers for years. VDRs are known as a secure, practical, and reliable tool for giving and getting insights into important business data, confidential documents, and financial information.
There is no doubt that VDRs offer significant benefits, such as clear data organization, different levels of user accesses and user permissions, resources savings, or easy updates for all involved parties. However, with increasing requirements for transparency and the need for the faster turnover in the processes, we come to the questions – do VDRs really provide investors and asset managers with the best possible way to exchange data and make the DD process more efficient?
Why virtual data rooms might not be the best (or only) solution for fund management data sharing?
Data shared through VDRs are usually created in different document formats, and not structured in the same way, varying among managers. Consequently, before diving into any type of analysis, asset owners and investment consultants have to spend much time compiling PDFs, Word documents, and Excel sheets.
Sharing information through documents is not only impacting the time spent by allocators, but it can also impact the accuracy of the analysis, due to the risk of human error when manipulating and reading through dozens of files.
From the compliance and audit perspective, it is important to trace the source of each piece of information extracted from those files and included in due diligence reports. This aspect is quite questionable and difficult to achive once data is extracted from original documents and restructured in a new setting.
These are some reasons why, nowadays, both investors and investment consultants are more and more insisting on receiving digitized and granular data that can be analyzed and compared easier.
They want to avoid side-tasks of structuring received data and dive into data analysis as soon as possible, in order to speed up asset manager due diligence process.
In this context, it is in the best interest of fund managers as well to share data in a more usable format. In the end, asset owners spending more time to decide is ultimately impacting them.
Achieving faster and more efficient due diligence process is possible only through changing the established practice and turning toward new channels and tools.
Is there a sight of the change in the investment manager due diligence established practice?
Yes, the change is evident, but only in certain aspects. In private equity, for example, some technology companies started providing tools that allow GPs to share their track records and cash flows with LPs in a way that facilitates the analysis of performance.
Narratives, qualitative data, and other reports, on the other hand, are still prevailingly not structured files, shared through VDR or emails. And the same goes for other types of due diligence data, still exchanged through documents and standard managers DDQs.
We are testifying of an increased interest in digitizing fund managers information by using dedicated tools. Once the data is digitized it will be possible to aalyze it, retrieve it and compare it.
OCR and other modern technologies, such as NLP and machine learning, are also finding their way in the due diligence process, with the aim to automate the extraction and analysis of information from scanned documents and PDFs. But still, this is adding a new layer of manipulation and digitization should happen a step before, at the source!
Diligend, for example, helps investors collect managers data in a digitized form through customizable, secure due diligence questionnaires and other unique technologies.
Through the years, VDRs have become so common in the investment industry that some investors omit to search for better solutions to access and use the managers´ data. Managers, on the other side, feel comfortable with that way of sharing data, and consider it as a good practice.
However, due to the combination of the asset owners´ increased need to optimize their time, to access more granular data, to have a high level of the due diligence process transparency, and the appearance of new technologies, we will definitely see a decrease in the usage of VDRs.
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