Investment and the Importance of Reputation
03 January 2018
Whether you are a private individual looking to invest in a
fund or a fund looking to invest in a business, the decision-making process
will be driven by many factors.
Whatever the opportunity, the criteria for deploying capital
is often set by allocation and compliance rules but, more often than not, the
decisive factor is reputation.
Investors will typically examine the track record and risk profile of a fund manager or CEO as well as conducting reputational due diligence. In the first stage of this selection process, typical questions will be: what have the returns been like? How stable is this fund? Who is managing my money? Are my interests aligned with those managing this business?
Often, the starting point for this due diligence is a superficial check of the internet content and maybe a few database searches. But this can also lead to a more rigorous investigation involving the engagement of third-party intelligence and investigations professionals to produce a report which may go beyond the professional to examine the private individuals involved.
This means that the information readily available about a fund manager in the public domain takes on massive importance and has implications on their perceived suitability.
If you are a manager of an off-shore fund, your online footprint assumes even greater importance due to regulatory constraints, especially in Europe. Many off-shore funds rely on the reverse solicitation rules of passive marketing to attract fresh investment (active marketing is only permitted alongside stringent rules encompassing remuneration and disclosure set by the EU). This means that what first attracts a potential investor may be a story in the press about the fund itself and/or its managers.
An article charting the market-entry or recent returns of a fund or a company could well lead would-be investors to do their own desk-top research. What could they find out about the fund itself and/or its principals?
Ensuring your fund can withstand the scrutiny of open-source research is the difference between being investor-ready and not. Before they cross the threshold of a fund, potential investors will conduct open-source research which will either deter them or encourage them, depending on what they find.
Furthermore, that material doesn’t just have to be based around a professional profile. Information can be personal too. Much can be derived from information inadvertently made available online; from office lease arrangements, to private residences and off-shore assets, the lifestyles of fund managers, their past performances and their personal proclivities can be pieced together through sophisticated online and deep web searches. If investors want to know their money is in stable, trustworthy hands and funds want to protect themselves from the risk of early redemptions, they need to cover all bases.
With the additional consideration of the General Data Protection Regulation (GDPR) and the need for funds to have a cyber security strategy in place, the information stored about a fund or its manager in the public domain will inevitably become a gateway issue for concerns. Investors will ask themselves about the proactive steps a fund will be taking to protect not only the privacy and reputation of its key assets (i.e. its managers) but also how secure the business itself is to a cyber-attack or data breach.
Think also of the risk appetite and compliance considerations of service providers such prime brokers or other financial counterparties. A misinterpreted piece of information about you or your business could mean the closure of a bank account and the inability to raise finance. These issues could be avoided through a more diligent approach to managing your public profile.
In the first instance, our advice to any fund manager or business looking to attract new investors is:
Assess all of the information about your fund and your employees that is in the public domain. Through financial services registers and other database searches, it is easy for a third party to assemble a list of employees at a particular fund and research each individual.
Consider the picture this information paints and the message it conveys to the outside world.
Don’t forget the personal lives of your key employees. Have a social media policy in place, enforce it and regularly monitor to test its adherence. If there is material there which could bring you into disrepute, seek advice on having it taken down. If there are disused social media accounts, shut them down or tighten their privacy settings so that old content isn’t still viewable.
Assemble a cyber security plan to protect your core data from internal or external breaches: consider access checkpoints for files and removing sharing and saving privileges from those who don’t need them
Conduct a full review of online information and media coverage on you and your fund and seek legal advice on correcting or removing any erroneous information in the public domain.
Practising good online discipline can be the difference between winning and losing out on new investment. A disregard for the nature and content of freely available data and information about you or your business is ultimately an operational risk. But if you address this potential liability proactively, you will have the peace of mind to continue concentrating on what you do best.