In this episode of Critical Thinking, Manish Solanki, Head of Mercer Sentinel Group Europe, is joined by Tony Martinez, Head of Mercer Sentinel Americas, and Ashleigh McDowell, Principal at Mercer Sentinel Group, to explore why Operational Due Diligence is becoming an essential component of investment decision-making. With increasing market volatility, regulatory pressures, and rapid technological advancements - including the rise of AI and cybersecurity threats - asset managers are facing new and complex operational risks. The conversation delves into how investors can mitigate these challenges, ensure robust governance, and protect their portfolios from operational failures. Key takeaways include: The growing impact of AI and cybersecurity on operational risk: Asset managers are increasingly relying on AI-driven tools to enhance efficiency, but this comes with significant risks, including data manipulation, AI-generated fraud, and cybersecurity threats. The rise of sophisticated phishing attacks and deepfake technology has heightened the risk of financial losses, making it critical for asset managers to implement AI risk management frameworks, conduct rigorous testing, and enhance cybersecurity protocols to protect sensitive information. Why regulatory changes are reshaping operational due diligence: The financial industry is undergoing significant regulatory shifts, with new frameworks such as the Digital Operational Resilience Act in Europe imposing stricter compliance requirements. These regulations demand greater oversight, increased reporting, and enhanced operational risk management practices. Asset managers must adapt quickly to avoid penalties, maintain investor confidence, and ensure operational resilience in an increasingly regulated landscape. How operational due diligence is evolving for private markets and emerging managers: As institutional investors allocate more capital to private markets, they face unique operational challenges, particularly with smaller, boutique asset managers. ODD plays a critical role in evaluating the governance, internal controls, and risk management processes of these firms. Investors are increasingly using ODD findings not only to vet managers but also to negotiate investment terms and ensure alignment with best practices in operational risk management. This content is for institutional investors and for information purposes only. It does not contain investment, financial, legal, tax or any other advice and should not be relied upon for this purpose. The materials are not tailored to your particular personal and/or financial situation. If you require advice based on your specific circumstances, you should contact a professional adviser. Opinions expressed are those of the speakers as of the date of the recording, are subject to change without notice and do not necessarily reflect Mercer’s opinions. Read our full important notices - click here
