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Essential Due Diligence Checklist for Private Market Investments: The 6 Questions Every Investor Should Ask

Joan Charanas
Joan Charanas
November 30th, 2023
Close-up hands noting financial report with market trend graphs for due diligence in private investments

Even experienced private equity investors should continue honing their due diligence checklists. Using a set of key questions allows you to dig deeper into new funds and avoid pitfalls obscured by private markets' lack of transparency. Asking the right questions also enables better confirmation that complicated fund structures align with your specific return needs, timeline preferences, and risk tolerance.

This article outlines six important questions all private equity investors should use to see through marketing hype and gain the solid grasp required for wise commitment decisions:

1. How consistent are returns across prior funds and vintage years?

As an experienced investor, you know verified IRRs across a GP's past funds indicate the reliability of future outcomes. Examine returns for steady results over multiple economic cycles, drilling into drivers. Compare overall IRRs and cash multiples versus appropriate benchmarks given the strategy and region. Watch for unusual peaks or dips possibly indicating excessive risk-taking at points in the cycle. Don't forget to factor in management fees as you evaluate headlines returns. The best GPs share granular deal-by-deal performance analytics. Reviewing deal segments can prove both articulated strategy alignment and competency generating projected profits.

2. Is the fund’s strategy sustainable and aligned with my investment goals?

Performance is just half the equation - the other critical aspect is whether a GP's strategy seems sensible for the current environment and your personal portfolio aims. Request the fund's investment memo to inspect its overarching approach and targeted sectors, deal types, hold periods, and projected return drivers. Evaluate if near-term plans are grounded or represent “style drift” chasing unsustainable short-term yields unrelated to long-term competencies.

Assess how the investment thesis and methodology aligns with your requirements like desired returns, cash yield preferences, geographic exposures, asset class synergies, and ESG priorities. Confirm the GP's time horizons, projected holding periods, and position sizing match your liquidity needs and risk temperament. Understanding the fund’s strategic framework provides the context to judge whether consistency seems likely based on current cycle conditions and team capabilities.

Asking insightful strategy questions also allows determining if the GP can clearly articulate a coherent approach or instead relies on vague industry jargon and tropes.

Investor examining a fund's strategic plan and targeted sectors for long-term alignment.

3. How does the fund address risk management?

Private equity investing involves substantial risk not only in individual portfolio companies, but also at the fund structure and operations levels. It’s crucial to assess how portfolio company risks will be managed post-investment. Verify the fund requires board seats to oversee operations. Confirm the due diligence checklist includes interviews with management to evaluate leadership strength.

Ask about value creation plans to improve companies after acquiring them - for example, whether new technology systems will be introduced to enhance productivity. Get details on the fund’s advisors and relationships that can be leveraged to de-risk deals.

Evaluate routine financial benchmarking and forecasting processes that enable staying ahead of performance downturns. Understand escalation protocols if a company significantly underperforms its thesis.

Review how the fund insulates against macroeconomic cycles, global events, supply chain crises or other outside shocks that affect returns. The resilience processes differentiate veterans with experience across decades of ups and downs from first-time funds.

Also, verify GPs and affiliates co-invest a minimum of 1% in their own funds. Skin-in-the-game ensures managers have personal capital risk at stake. Enquire if later funds will recycle proceeds from high-performing early funds - indicating confidence putting personal wealth back for employees beside third-party money.

4. Who are the key people behind the fund?

It's said that you don't just invest in a fund but rather the GP running it. So gather in-depth background on the key decision makers - what are their qualifications, area expertise, track records, and alignment incentives?

Leverage networks to get candid insight on GP reputation from peers and shareholders in previous funds. Ask probing questions directly to test experience as well as discover personality fit - will communication styles mesh well?

Evaluate personnel continuity at the firm, any churn, and mitigating succession plans. Research compensation structures - are bonuses adequately tied to fund performance versus raw asset gathering? Understanding the human leadership element is vital for truly gauging capabilities to handle economic environments.

Meetings with the fund partners in person can clarify commitment levels or reveal disconnects between spokespeople and actual managers. The relationships between your capital and the fund managers matter greatly over 10-12 year fund lifecycles so compatibility should be confirmed before papers get signed.

Key decision-makers in a private equity fund showcasing their expertise and leadership. Collaborative business strategies

5. What are all the associated fees and expenses?

Private equity sticker fees have a well-known structure of ~2% management fees and 20% carried interest. But you must take the time to quantify total costs since expenses can rapidly eat away projected net returns.

Request the latest audited financials from the GP entity to inspect operating expenses, fund setup costs, and overhead allocations across funds. Factor in advisor fees, consultancy costs, broken deal expenses and ask if these are capped at a deal or overall fund level to avoid overruns.

Evaluate fee tiering - does the fee rate decline as fund size increases? Is carry subject to a preferred return or recoup investment costs first? Fee terms can align investor-GP outcomes while complex waterfalls may enable over-earn by management.

Run earnings scenarios adjusting for total estimated expenses. Allocators targeting 17-20% IRR net to investors see over 70% of that eaten away solely by the classic 2 & 20 fee load. Thus baseline projections must support the fees.

Compare economics versus both prior vintage funds at the same shop and competing managers pitching similar strategies. Don't underestimate the drag of fees on ultimate returns.

6. What is your deal sourcing and evaluation approach?

The source of a private equity fund's deals is hugely influential on ultimate returns. Many GPs find acquisitions through auction processes - where a target company or asset is openly put up for sale. However, winning competitive auctions often demands paying higher purchase prices that cut into profits.

An alternative is proactively sourcing proprietary deals through intensive outreach efforts to potential sellers who have not formally put companies on the market. While more time and research intensive, directly contacting owners can access deals other funds miss, supporting lower acquisition costs and unique upside if valuations rise after securing a strategic yet little shopped asset. Evaluate how wide the net is cast when sourcing acquisitions and investments. More pipelines allow being selective for quality.

Question how many annual opportunities are reviewed and in what ways proprietary models, data, or connections provide advantages over other firms when securing high quality assets.

Review the decision making and due diligence roadmap leading up to acquisitions or investments. Is approval consensus-driven or autocratic? The depth of sourcing networks, investment analytical expertise, and leadership team dynamics indicate an ability to repeatedly uncover and accurately assess deal prospects most others overlook or misevaluate in the market.


Conducting intensive due diligence in opaque private markets requires asking detailed strategic questions that reveal underlying risks and confirm alignment between investors and complex fund vehicles. Preparing a thorough checklist covering areas like return verification, expenses drag, management rights, risk mitigation policies, personnel competencies, and strategy sustainability allows confident allocation. Documenting clear answers also facilitates monitoring alignment over the long-term course of the partnerships.

Of course even the most thorough diligence process cannot eliminate risks inherent in investing capital through intermediaries into high-growth companies, real estate, or debts in dynamic economies. However, investors who purposefully interrogate and challenge private equity GPs position themselves to meet return requirements. Those committing based solely on marketing pitches or assumptions around headline performance metrics too often regret the outcomes years later at cash distribution timeframes.

By incorporating these 6 key due diligence questions into your evaluation process when considering new private capital commitments, you can cut through obscurity and make sound allocation decisions aligned with your portfolio objectives.