verger-capital-ocio-rfp-questions

Seven RFP Questions for OCIO Providers

The long-term nature of non-profit endowments and foundations is one of the key distinctions between these institutions and other investors. As a fiduciary of a non-profit, the impact you have on the organization will be measured in perpetuity. It is an incredible responsibility and one that is not taken lightly. As non-profit boards evaluate how to best position the organization for long-term success, ensuring you have the right partners in your corner is critical.

The prevalence of Outsourced Chief Investment Officers (OCIOs) has grown tremendously. More and more non-profits recognize the value a dedicated partner can bring to the investment and oversight of endowment assets as part of the organization’s overall financial health. The right OCIO relationship has the potential to increase efficiencies and maximize investment opportunities, supporting non-profit board members in their objective to leave the organization closer to fulfilling its mission than when they started.

As interest in OCIO grows, so does the complexity of the landscape. OCIO firms come in all shapes and sizes, making it increasingly difficult for non-profits to evaluate providers side-by-side (as evidenced by the creation of the Alpha Nasdaq OCIO Index). This places an even greater emphasis on the due diligence process, including the quality of an organization’s Request for Proposal (RFP). As boards and investment committees prepare to formally evaluate OCIO providers, thoughtful consideration must be given to the questions posed. Prioritizing purposeful questions helps ensure that both the administering organization and responding firms have a shared understanding of the organization’s requirements, goals, and expectations. Below are seven key questions every non-profit should ask when evaluating OCIO providers.

 

Detail your experience with non-profit organizations like ours.

No two organizations are exactly alike; however, there is a significant benefit to partnering with an OCIO with a background and experience in non-profit investment management. There is more to running a successful non-profit than managing its investment portfolio. The response to this question should demonstrate a provider’s understanding of the unique context in which the organization operates. There are so many components that paint the full picture of a non-profit: its history, its mission, its stakeholders, the broader community. A true partner should have an appreciation for the organization’s operations at all levels, including familiarity with the requirements of back-office staff and the organization’s responsibility to donors and key stakeholders. Investment expertise and track record should not be overlooked; however, the right fit exists where investment acumen is coupled with an OCIO’s ability to work alongside the organization as a seamless extension of its team.

What percentage of your company’s total revenues and staff is attributed to your OCIO business?

Some firms offer OCIO services as just one of many lines of business. This type of structure may result in stretched and competing resources as each business unit seeks to achieve its own objectives and goals. This question seeks to clarify the level of focus and emphasis placed on OCIO services and clients within the firm. It is important to ensure the organization and board will receive an appropriate level of attention, consideration, and access both in terms of the management of the portfolio and client servicing overall. In addition to understanding focus, this question provides greater transparency into potential conflicts of interest. For example, firms with multiple lines of business may use their OCIO services to promote proprietary investment products, which may not be in the client organization’s best interest. When it comes to OCIO providers, there is value in finding a partner with expertise, focus, and a commitment to doing one thing and doing it well.

What services set you apart from the competition?

As mentioned earlier, the OCIO market is packed with firms, many of whom are indistinguishable from the rest. The financial services industry has long been built on relationships, and while that sense of fit and connection are critical when selecting an OCIO, non-profit boards should not hesitate to ask for more. Services like investment policy statement (IPS) review, performance reporting, and board engagement, while important, are standard components of OCIO service and are replicable across most firms. This question attempts to assess where a specific OCIO stands above its peers. Differentiating services could mean access to specific systems, research, or investment vehicles, but what may be even more meaningful is a firm’s ability to demonstrate a willingness to go above and beyond for their clients. Strong OCIO providers correlate their experience with opportunities to address needs within client organizations, such as supporting the non-profit’s partners at tax and audit time, providing educational opportunities to board members and beneficiaries of the non-profit’s services, and facilitating successful conversations with donors and fundraising officers. The OCIO must be committed to understanding the operations and requirements of the organization to anticipate future needs and increase operational ease.

Explain your investment results in down markets.

Many non-profit portfolios have performed well over the past several years on the heels of a strong equity market. But markets are often cyclical, and the next ten years are unlikely to mirror the last. As non-profit boards prepare for the future and consider what is a perpetual time horizon for many institutions, it is essential to assess how an OCIO provider might fare when the market environment is less accommodating. This question attempts to analyze the provider’s ability to protect client capital in down markets while still participating in market growth. Long-term investors are not immune to drawdown risk, and minimizing loss of capital is the best way to compound and grow intergenerational wealth. For these reasons, it is beneficial to identify an OCIO that is prepared to perform and provide for your organization in all market environments.

Describe your capabilities in alternatives and private investments.

Alternatives and private investments may provide an attractive option for endowments and foundations with long time horizons and a risk profile that makes these investments feasible. An allocation to alternative strategies provides non-profits with a differentiated source of return when compared to more liquid strategies, as well as strong potential for alpha over public markets. This question intends to vet an OCIO’s expertise in and exposure to non-traditional strategies. Responses to this question should provide insight into what alternative strategies and private investments the organization would be able to access as a client, as well as the OCIO’s ability to source these unique opportunities.

Provide evidence of your ability to access top managers. How does your firm allocate access to capacity-constrained managers across clients of varying asset sizes?

Manager selection is a key driver of alpha generation, and it is an OCIO’s responsibility to separate talent from luck. This is especially critical in private investments where the dispersion of returns is wide, and missing out on the best managers could mean leaving money on the table. Non-profits should ask an OCIO to provide a track record of quartile rankings by vintage year for private investment funds. In addition to assessing the quality of managers, non-profits should request clarification regarding their access to these funds, should they become a client. In some cases, access to capacity-constrained or highly coveted managers may be reserved for clients of a certain asset size or type.

Describe any terms or other withdrawal restrictions that impact liquidity.

If the last two years have taught us one thing, it is to expect the unexpected. As such, liquidity considerations must constantly be evaluated, given the number of non-profits that rely on annual distributions to support their operations. Understanding how potential OCIOs can match liquidity levels to the organization’s needs is critical. This question seeks to provide transparency into any terms of the partnership that may limit access to endowment funds in the future. Boards should not hesitate to ask OCIO partners about policies and procedures related to the potential future dissolution of the relationship early in the evaluation process. Before selecting an OCIO, understand what lockups or withdrawal restrictions are in place that may make it challenging to access your capital if a change is warranted. A non-profit leader’s fiduciary responsibility is to the organization and its mission. Planning for a potential exit from a relationship is as critical as selecting the right partner in the first place.

 

In many cases, writing an RFP is the first step non-profit organizations take along their path to selecting an investment management provider. Asking the right questions provides fellow organizational leaders and supporters with the information required to find the right partner at the right time. It is standard practice for most non-profits, large and small, to approach operations and mission delivery from a team perspective. Non-profit leaders work to identify and develop their organization’s most valuable players and ensure they share values, goals, and complementary competencies across the team. Applying this same approach to managing an organization’s investment portfolio by partnering with an OCIO can greatly enhance what the organization can accomplish today and into the future.

 

For a more detailed recommendation of due diligence questions for Outsourced Chief Investment Officers, download our template OCIO Request for Proposal.

DOWNLOAD OCIO RFP TEMPLATE

Subscribe to Our Blog