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What is Due Diligence and How Can It Help My Investments?

In Short: Due diligence is an investigation or audit of a potential investment opportunity or product to confirm facts and/or uncover risks. It refers to the research done before entering into an agreement or a financial transaction with another party. For example, when purchasing a business the investor may want to review financial records or visit the business in person. Percent has a stringent due diligence process as a part of the company risk framework.

There’s no 100% right way to invest, but there is a wrong way: putting your money in an investment without doing a single bit of research in that investment.

Investing takes patience and care due to the risks involved. Yet if you do your research on potential risks, worst case scenarios, and numerous other factors surrounding your investment, you can help assess how these risks work for your portfolio and risk tolerance. Doing this research is called doing your due diligence.

What is Due Diligence?

All investors — from individual “retail” investors to large institutional investors — should perform due diligence on every investment they make. This process allows investors to assess an investment, the company (or companies) involved with the investment, and any factors that could have positive and/or negative effects on the investment. After all, no investment is entirely without risk, but by assessing risks and things that could lead to risks, one can make a more calculated, informed investment.

No one investor’s due diligence process is the same. Some investors might perform a thorough examination into every publicly available document pertaining to an investment and its related companies. This could include SEC filings, data files, reports, and even third-party investigations.

Larger investors often employ extensive measures into their due diligence process, conducting background checks on key figures involved in an investment, costly reports and risk assessments, and other investigative measures to assess an investment’s risk.

Not all investors perform due diligence, sometimes to their detriment. In recent years, investing became significantly easier and more accessible to pretty much anyone willing to sign up for an account, making transactions as easy as pressing a button. Yet the time between learning about a particular investment and pressing that button should be significantly longer than the second it often takes, as that’s where risk assessment, auditing of the company/companies, and verifying a company’s financial standing would come in.

How and Why Does Percent Assess Risk?

Like investors, investing platforms also perform due diligence for risk assessment, albeit for regulatory reasons and on behalf of investors. Instead of serving up every deal in existence, platforms like Percent have entire teams dedicated to performing due diligence on investments and the companies involved.

In our case, this allows us to provide highly vetted and quality investments to our accredited investors. We share some of our findings as part of our surveillance reports, which you can find attached to each deal on the Percent portal.

As for how Percent conducts due diligence, our own Prath Reddy describes the framework in “Our Holistic Approach to Risk Management.” In the article, he explains how we:

  • Painstakingly analyze the creditworthiness of all the counter parties that impact the cash flows that ultimately flow back to our investors
  • Utilize a best-practices bottoms-up approach mirroring institutional underwriting standards
  • Employ a proprietary risk scorecard to both quantitatively and qualitatively assess every counterparty and offering
  • Thoughtfully structure our investment opportunities with the primary objective of protecting your principal.

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