Before visiting the restaurant, you look at the menu. In preparation for the vacation, you pick up a travel guide (or at least browse a few blog posts). By the same token, prior to making a transaction in the secondary market, you must perform due diligence.
Investment due diligence is the process of investigation and analysis that occurs before capital is allocated. This exercise helps investors identify the impacts of a transaction, including risks, plausibility, opportunities, and other considerations.
Let’s take a look at how this important practice applies specifically to the public and private secondary markets.
Both General Partners (GPs) and Limited Partners (LPs) are responsible for due diligence — the evaluation of the feasibility, risks, and expected returns of an investment opportunity. This assessment is crucial for ensuring the investment aligns with the strategic priorities, financial objectives, and risk appetite of all stakeholders involved.
Due diligence is the bedrock of any strong secondary market investment strategy. Whether investing in public secondaries like the stock market or private platforms like Augment*, which connects buyers and sellers of shares in private companies, it can be helpful to first form a mental picture of the investment in consideration.
Then, look at volatility and market capitalization to determine how one company or fund compares to others in its class. Accumulate as much relevant information as possible, including details about revenue and net income trends.
Research and analysis of the numbers — known as hard due diligence — aren’t the only actions that go into the process. Soft due diligence investigates less tangible parts of a company or asset, such as culture or environmental impacts.
In certain secondary transactions, due diligence can come in the form of questionnaires, as buyers seek to better understand investment targets and valuations. Underwriting calls between GPs and lead investors are also common practice in the secondary market.
The regulation landscape continues to shift in the secondary market, with more intense scrutiny aimed at enhancing integrity and investor protection across the sector. But with more reporting requirements comes more information for investors performing due diligence.
When it comes to private secondaries, sourcing intricacies and a lack of information can make due diligence more difficult. Platforms like Augment, however, are adding transparency to a sector of the market that was previously more guarded for individual investors.
Augment makes the process of researching prices easily accessible in a single view, and anyone can log in to look up historical pricing based on bids/asks, mutual fund marks, and executed trades. This provides investors with many of the resources required to find prevalent information before making a capital allocation.
Due diligence helps investors establish an accurate valuation while ensuring an investment fits within a portfolio. Having a comprehensive view of an opportunity leads to more informed decision-making, a hallmark of any strong investing strategy.
This analysis can at times be complex. But it’s a key cog in the investment process, as it mitigates risks by offering a complete outlook before a decision is made.
The research gained from the due diligence process can be repurposed into an easily digestible report. By summarizing findings clearly and concisely, investors set themselves up for success, making it easier to put whatever insights they’ve gleaned into practice.
While Augment provides tools and information to assist with due diligence, investors should conduct their own independent research and consult with financial and legal advisors before making investment decisions.
*Augment is a registered Alternative Trading System (ATS). All securities transactions are conducted through Augment Capital, member FINRA/SIPC. Augment Capital serves as the broker-dealer for transactions executed on the Augment ATS platform.
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.