Oct 6, 2018

How to Conduct Reference Checks

"Don't forget the simple but important things that need to be done in the investment process."

With over 25 years of experience working with alternative funds, we asked Patrick Campbell of Perth Advisors what the most common miss is by investors during due diligence. “Reference checks”

Reference checks are an important part of the due diligence process. In addition to giving third-party validation to the due diligence documents the GP has given you, they can provide additional color on many qualitative aspects of how the principals conduct themselves inside and outside their firm.

For LPs / Investors:

Every investment is different, so your reference check will vary from manager to manager, but here are some guidelines that you may find useful.

Verify Historical Accuracy: Ensure the reference’s account matches the historical data you’ve received about the firm or individual.
Prepare Questions: Develop a mix of open-ended (e.g., "How do you know Janet Smith?") and specific questions (e.g., "Who actually led the XYZ deal when you worked together?") tailored to the relationship with the principal (e.g., superior, peer, junior, vendor).
Initiate Contact Thoughtfully: Typically, a brief email requesting a 20-minute conversation is sufficient.
Include Essential Queries: Don’t overlook fundamental questions like, "In your experience, does this person act in an honest and trustworthy manner?" Such inquiries are critical as they relate directly to the integrity with which your capital will be handled.
Conduct the Reference Check: Surprisingly, many investors skip this step. The case of former Madoff investors underscores the importance of this due diligence component.

For GPs / Fund Managers:

Provide Diverse References: Offer LPs a list of about six references that can affirm your background and track record, including at least one investor who can vouch for your capabilities.
Choose References Wisely: Avoid listing other alternative fund managers as references. Despite not being direct business competitors, they are rivals for capital, which can lead to conflicts during the reference process.

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