What is “deep diligence”?

Not talking about PE where you get to go under the hood and you hire Bain to write up reports for you. A lot of Hedge Funds (both l/s equity and distressed/credit) say that they do deep diligence in evaluating investment opportunities. What exactly does this entail besides perusing everything public, doing a bunch of GLG/AlphaSights calls, speaking to management, and talking to the street analysts on the desk and in publishing if relevant. I'm at a shop that does all these things (and we don't go private unless we have to for a RX process or something), but I feel like when I talk to people, this only scratches the surface of what people do when they say they "go deep on names" like an SVPGlobal would.

Comments (11)

  • Incoming Analyst in Other
May 1, 2020 - 5:30pm

worked at a distressed fund/will be starting at another distressed fund where people used to throw around "deep dive" or "deep diligence" and they pretty much just did what you mentioned. My bosses also used to sometimes do on ground trips eg. visit a country where the co they're looking has a factory or something because they wanted to "check it out" but I guess they just used that as an excuse to travel to a nice place instead of just visiting a factory in some random state in the US. Idk if they do something even more when they're involved in a rx process because I didn't really get to directly work on one as an intern but I guess I'll find out soon

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  • Investment Analyst in HF - Event
May 2, 2020 - 9:47pm

Of course you have a lot of people/funds trying to differentiate their research process by calling it "deep diligence" and I'm sure at plenty of places it's the standard diligence process you described above. So if everybody is doing it, is it really "deep"? I think the people doing the really hardcore deep diliigence tend to be short sellers, as this is often where the edge comes in ("what's the most important piece of information I can find/know that everybody else doesn't?")

To that point, I say "perusing everything public" becomes much larger than you might think if applied properly. The internet is a big place and can reveal a hell of a lot of "secrets" if you know where/how to look.

  • Associate 2 in HF - Other
May 3, 2020 - 2:25pm

you're right about that, "everything public" is a bit of a stretch and it's a big world out there. there's that Netflix episode on Dirty Money all about the Valeant shorters and the lengths they go to find information. at that point it's like not even publicly available info they're digging up, it's like legally obtained MNPI, similar to if you paid 100,000 or however many people to watch every Chipotle cash register and keep track of what everyone ordered. a great 1 hr watch.

but it seems like I'm not missing anything major in the diligence process here somehow. everyone does some form of the same stuff.

  • Analyst 2 in HF - EquityHedge
May 7, 2020 - 5:42pm

There is a range of diligence levels. I'd argue that lots of shorter term money (mostly multi managers) doesn't do a ton of deeper diligence on companies, but more so does a ton of work to understand sentiment leading up to potential events that may change the share price materially (quarterly earnings, upcoming special situations, unique industry/macro data points coming out, etc). Sometimes deep diligence just involves doing a ton of work to understand why a business is a good business (talking to experts, using the product, speaking to management 50 times until you look under every rock). It's sorta like if you are buying a house, you'd want to visit, look around, see if you trust the person who is selling it, etc... you need comfort with that and also if you are value-oriented, understand the "set up"/dislocation to see why a company is undervalued.

May 7, 2020 - 9:01pm
CHItizen, what's your opinion? Comment below:

Have you read the Luckin Coffee short thesis? https://drive.google.com/file/d/1LKOYMpXVo1ssbWQx8j4G3-strg6mpQ7F/view

I would count going through manager WeChat groups and digging through the trash for receipts as "deep diligence".

  • 2
May 16, 2020 - 6:38am
TheBuellerBanker, what's your opinion? Comment below:

Because you mentioned them, GLG calls are honestly an amazing part of diligence in that you really get a tangible view of the company / products / services you're acquiring by professionals who really use them on a day to day basis. I'm not sure honestly, cost aside, why GLG can't be used earlier on after an initial pre-IC discussion or at least when a thesis has been developed and could use some validation

  • 1
May 16, 2020 - 9:03am
DustOff, what's your opinion? Comment below:

I believe it really isn't my place to as all of other commentaries came from real industry expert, but from my intern experience at a good value fund. We did all different things. Often went out on street for survey, interviewed suppliers/buyers, professors, retired executives in the industry, competitors' management. Prof. Kian Ghazi at CBS is well recognized for his "scuttlebutt research".

The fund is Asia focused, where there were many opportunities could be drawn out with little diligence. Like Chinese scams companies, Luckin Coffee was the fund's major bet, as we went to China, literally visiting +20 stores, asked people what they normally get, how much is ASP, run the numbers for average customers per day, came up with an idea what the company saying cannot be true. (def. watch China Hustle. It literally shows how they're fxxxing us)

  • 1
May 16, 2020 - 9:06am
DustOff, what's your opinion? Comment below:


Jan 6, 2022 - 2:03pm
wubbster0408, what's your opinion? Comment below:

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