How are pension plans conducting due diligence amid physical distancing?

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Businesspeople has meeting in modern office © rawpixel /123RF Stock PhotosBefore physical distancing, pension plan sponsors typically held in-person meetings and site visits when allocating to new investment managers.

“I like to look people in the eye when they’re telling me what they’re going to do,” says Blair Richards, chief executive officer of the Halifax Port ILA/HEA Pension Plan. “It’s very old school and it’s not very scientific, but investing for me over time has really been a people process.”

While Lynn Healey, chief investment officer at the Teachers’ Pension Plan Corp. of Newfoundland and Labrador, also notes a preference for looking people in the eye, her fund is accustomed to doing more virtually because of its geographical proximity.

In addition, she believes what’s gained from an onsite presence in the due diligence process may not be as big as people think it is and, in fact, a virtual approach can oftentimes be more efficient.

Dave Makarchuk, wealth business leader for Western Canada at Mercer, agrees digital can be a more efficient use of time because the players are more prepared and it’s easier to look up information. “There was good things about travelling and you could look at the whites in the eye of the other manager and you could see the other people there . . . but it kind of turns into a bit of a beauty pageant and a show, whereas I think there’s more substance than sizzle possibly from this environment.”

Further, he notes it’s easier to prepare for virtual meetings without travel time and to take notes compared to face-to-face meetings.

The Teachers’ Pension Plan Corp. was only launched in 2016. In its early days, the team relied more heavily on investment consultants in the due diligence process. However, as it evolved, it implemented a due diligence governance framework involving site visits with managers when it makes sense, based on a risk assessment, Healey adds.

Over the past couple of months, the fund has onboarded managers for two bond mandates, but the team did have the opportunity to meet the managers in person early in January before the pandemic.

The inability to do an onsite visit wouldn’t be a show stopper, notes Healey, even when working with a new manager, although she says it would depend on a number of factors. “I think, generally speaking, if your due diligence is going well and you know, although it’s a manager you may not have exposure to, but it’s an asset class that you’re familiar with and perhaps a geography you’re familiar with, . . . I don’t think it would stop us from proceeding in the absence of other risk factors or issues that may have been identified.”

She notes, however, it would be a different situation for alternative funds and with direct investing. “We don’t do any direct investing right now, but from my perspective, I would say that if, in an environment like this, where you weren’t able to do site visits and meet physically, I think we would end up putting direct investing on hold until those could be done.”

Catherine Jackson, head of the sustainable finance practice at Mosaic Governance Advisors, refers to a situation where an investor purchased buildings in a foreign country that it believed were being used for one purpose, but were in fact just empty buildings.

In the new normal of physical distancing, investors may borrow practices typically used in the climate change space, Jackson notes. Particularly, technology like satellites or drones may play a bigger role going forward when conducting due diligence on assets like infrastructure. Another option for pension plan sponsors is to work with trusted partners on the ground in other countries.

While some pension funds have already opened offices in different markets, Jackson doesn’t think it will necessarily offer advantages going forward because they’re in traditional financial centres that may not play the same role going forward.

Instead, she thinks the advantage will go to funds that are nimble enough and able to invest time and energy building relationships in different parts of the world. And, while there are firms that will do due diligence on behalf of another investor, it would be preferable to partner with firms that have skin in the game and co-invest alongside a pension fund. “And that co-investment structure has been around for a long time, so that is something that I would personally feel more comfortable with. And, if any of our clients asked about that, I would certainly feel more comfortable suggesting that because then it’s also a shared financial risk.”

Returning to fund investors, Healey says it’s still key to keep tabs on how their managers are dealing with due diligence on underlying portfolio of investments, particularly real estate and infrastructure. “We had some discussions with some of our fund managers around how they’re managing through it and a lot of them had said that if they can’t do a site visit or engage someone on their team in that particular location to do the site visit they won’t proceed with it.

“I think, on the fund side, one key aspect from both initial diligence and ongoing monitoring of the fund investments is just understanding how they’re dealing with the approach to diligence and you want to make sure that you’re comfortable that they’ve got that in check and a good handle.”

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