Changes in market conditions have resulted in a new emphasis on due diligence, as investors and fund managers rethink how to address areas such as debt, risk management and sustainability, as Andrea Carpenter reports

The INREV standard questionnaire for investment evaluation, generally known as the due diligence questionnaire, has played an important role in the due diligence process since 2007.

It is designed to collate the first round of information that an investor might need in assessing a new fund investment. This includes a fund manager's structure, strategy and real estate business, as well as a fund's strategy, processes, management, terms and performance.

The questionnaire has become widely used in the industry since its release and is generally perceived to be extremely helpful for all sides; investors gain the information they need and fund managers are able to prepare one version of the questionnaire for all interested investors.

However, in the wake of the recent downturn in the real estate markets, INREV received feedback that changes in market conditions were prompting a need to revise the questionnaire. Investors needed more information in such areas as debt and risk management, for example, so a revision was required to make sure the standard questionnaire remained ‘standard' among users.

Review of current needs
In response to this development, INREV undertook to review and update the standard questionnaire to ensure that, as the market has changed along with investor needs, it is relevant and up to date. The INREV due diligence committee, headed by Deborah Lloyd, partner in the Indirect Investment Group at Nabarro, took charge of the project.
Together with the real estate investment management team of Deloitte, based in the UK, the committee looked into how recent events have affected the kind of information now in demand.

Their investigation revealed that the recent investor experiences and today's uncertain financial climate mean there is a demand for more detailed information on a fund manager's experience in risk management. Not surprisingly, compliance issues are another area where the review determined that investors feel they need more complete information.

A third area where the committee found more information has become necessary for investors is a fund manager's experience in debt management. And although not directly related to the recent market upheaval, the committee discovered that going into the recovery more and more investors want to know what funds are doing in the increasingly important area of environmental sustainability.

At the same time that the committee examined what new subject areas need to be covered in the new questionnaire, it looked into whether the information elicited in the original questionnaire continued to be helpful and relevant, and whether any of the questions were outdated, unnecessary, or redundant. As part of this process, it closely scrutinised each of the more-than 100 questions that had been used since the first questionnaire was launched in 2007.

The committee also collected 18 RFPs from investors, which helped support the development of the first revised draft. As part of the revision process, INREV also held a mini-workshop on the topic in Frankfurt last November, which was attended by 60 members.

In addition, around 10 interviews with investors, fund managers and advisers were conducted as the questionnaire was refined. Input from the committee was ongoing and the group reviewed several consecutive drafts of the questionnaire, while INREV's management board also provided valuable input.

The new questionnaire
The revised due diligence standard questionnaire, which has been released to the industry, captures information on many new topics for the first time. For example, questions related to a fund manager's experience in risk management are included. In addition, questions designed to elicit more detailed information about the fund manager's experience in compliance issues, along with questions related to the fund manager's debt management experience, are important new additions.

Perhaps the most far-reaching change, however, is the inclusion of new questions related to environmental sustainability, as this topic is quickly gaining the attention of an increasing number of non-listed real estate investors and consultants. Its inclusion will also raise the visibility of sustainability issues within the rest of the non-listed funds industry.

Of course, beyond just expanding the areas of inquiry, an important goal of this far-reaching review is to gain buy-in from investors to use the questionnaire without changes. Although additional questions can always be asked by investors, it is hoped that by updating the questionnaire, the need for such changes can be eliminated, thereby presenting the needed information in a single industry-standard format. In pursuit of this goal, INREV hopes to get a commitment from several of the non-listed fund industry's biggest investors to sign up to the standard questionnaire without changes.

The inclusion of these new subject areas, in conjunction with the top-to-bottom review of areas of inquiry in the old questionnaire, should result in a questionnaire that meets the industry's information needs now and for the foreseeable future. Of course, in order to ensure that the questionnaire continues to be relevant and up to date, this exercise will have to be repeated periodically.

Given the benefits to the industry in terms of time saving and efficiency of having a single standard document that captures the lion's share of information that investors and consultants need to compare funds and make informed investment decisions, this effort is well worth making.

Andrea Carpenter is director of professional standards and communications at the European Association of Investors in Non-Listed Property Vehicles