Allocations to private equity, private credit and other alternative investments have become a standard part of institutional and high-net-worth portfolios. With that shift, the quality of due diligence matters more than ever: private funds are illiquid, valuations are model-based and a commitment typically runs for ten years or longer.
In manager selection, the same weaknesses appear again and again — not in the pitch book, but in the details behind it. These seven questions help an investment committee test whether a fund deserves a commitment.
1. Where did the historical returns really come from?
A strong IRR says little on its own. Break performance down into operational improvement, multiple expansion and leverage. Returns driven mainly by rising valuation multiples or cheap debt are harder to repeat when financing conditions change.
Ask for deal-level data and check the dispersion of outcomes: a track record built on one or two outliers carries more risk than a consistent portfolio.
2. How are unrealised investments valued?
Most of a young fund's reported value is unrealised. Review the valuation policy: the methods used (comparables, DCF, recent transactions), how often valuations are updated, how independent the valuation function is and how earlier marks compared with actual exit prices in previous funds.
3. Are the interests of the manager and investors aligned?
Look beyond the headline management fee and carried interest. Fee offsets, transaction and monitoring fees, the hurdle rate, the distribution waterfall and the size of the manager's own commitment determine how much of the gross return actually reaches investors.
4. How does the fund manage liquidity?
Model expected capital calls and distributions against your own liquidity needs. Ask how the manager uses subscription lines or NAV facilities — they can smooth cash flows, but they can also flatter reported IRRs — and what secondary market options exist.
5. Is the strategy consistent with the team's experience?
Style drift is a warning sign. Larger fund sizes, new sectors or new geographies often move a manager outside the area where the track record was earned. Check key-person provisions and how stable the team has been over previous funds.
6. How robust are operations and compliance?
Operational due diligence covers the fund administrator, auditor, depositary arrangements, IT security and AML/KYC processes. For EU funds, confirm how AIFMD obligations such as reporting and depositary requirements are met. Sustainability claims should be supported by data consistent with the fund's SFDR disclosures.
7. What does the downside look like?
Run scenarios, not just a base case: slower exits, lower exit multiples and higher financing costs. A fund that only works in the base case is a bet on a single outcome.
Practical checklist: deal-level track record · valuation policy and back-testing · complete fee and waterfall model · cash-flow pacing model · team and key-person terms · operational due diligence report · downside scenarios.
From questionnaire to repeatable process
The biggest improvement is rarely a longer questionnaire. It is a consistent scoring model: the same criteria, weights and evidence requirements for every fund. That makes decisions comparable, documented and easier to defend in front of a board or supervisor.
FINCON4 builds such due diligence toolkits and supports investment committees with independent fund analysis.
This article is for information purposes only and does not constitute investment advice or a recommendation to invest in any fund or financial instrument.