Evaluating a Private Fund

Why Private Fund Diligence Differs from Public Market Evaluation

When a family considers a publicly traded fund or a separately managed account, performance data is typically standardized, audited, and comparable. Private funds operate in a different environment. Return figures can be calculated and presented in multiple ways, valuations are often manager-determined until a liquidity event occurs, and the strategy a fund pursues today may look quite different from the one described in its founding documents. That combination makes independent, rigorous diligence not optional but essential.

The manager selection process for private funds is also longer — often spanning months of meetings, document review, and reference calls — and the consequences of a poor decision are harder to reverse. Once a capital call is funded, a limited partner typically has no practical exit until the fund itself generates distributions. A mistake in public markets can be corrected in minutes; a mistake in a private fund may take a decade to resolve.

Track Record: Who Actually Did the Work?

The most common due diligence error families make is treating a firm's historical performance as though it belongs uniformly to everyone currently on staff. Attribution — understanding which individuals sourced, structured, monitored, and exited each deal in the track record — is the more revealing question.

A firm might present a compelling ten-year return history, but if the two partners responsible for the best exits departed three years ago, the current team has not yet demonstrated that it can replicate those results. Prospective investors often ask managers to provide a deal-by-deal breakdown showing which team members led each transaction, what role each played, and what has happened to those individuals since. Firms that resist providing this level of attribution deserve additional scrutiny.

Understanding IRR, MOIC, DPI, and TVPI is a prerequisite here. A high Internal Rate of Return driven by one exceptional exit looks very different from a consistently high return across a broad portfolio. Unrealized value — captured in Residual Value to Paid-In — deserves particular skepticism, since those valuations reflect manager estimates rather than realized proceeds.

Strategy Drift and Mandate Discipline

Strategy drift occurs when a manager gradually pursues opportunities outside the stated mandate — perhaps a buyout fund that begins making minority growth investments, or a credit fund that moves down the quality spectrum in search of higher yields. Drift is rarely announced; it reveals itself in the portfolio over time.

Families evaluating a fund can look for drift by comparing each fund's actual portfolio composition against the original offering documents, then tracing the evolution across successive fund vintages. A manager who has drifted may explain the shift as opportunistic adaptation; a prospective investor should decide independently whether the new direction is one they want exposure to, and whether the team has the expertise to execute it.

Strategy drift also matters because a family's overall asset allocation is built on assumptions about what each manager will actually own. A fund that drifts from its mandate can inadvertently create unintended concentration risk in the family's broader portfolio.

Team Stability and Economics

Even the most talented investment team can deteriorate if its economics become misaligned. Diligence on the human dimension of a firm covers several distinct questions.

• Key-person provisions: Most funds include a Key-Person Provision that triggers if named senior individuals depart or become unavailable. Investors should understand exactly which individuals are covered, what the trigger mechanism is, and what rights LPs receive if the provision is activated.
• Carry allocation: How is carried interest distributed within the firm? A manager where carry is concentrated in one founder who is nearing retirement presents different succession risk than a firm where carry is broadly distributed among a next-generation team.
• Staff turnover history: Requesting the names and departure dates of all investment professionals who have left the firm in the past five to seven years — and then speaking with some of them — can surface culture and leadership issues that do not appear in marketing materials.
• GP commitment: The GP Commitment — the amount the general partner invests alongside LPs in its own fund — signals alignment. A manager whose principals invest meaningful personal capital alongside investors demonstrates a form of skin in the game that matters.

Fund Terms: Reading the LPA Against Market Norms

The Limited Partnership Agreement is the legal contract that governs nearly every aspect of the fund relationship. Private fund fees and terms vary considerably, and what is considered standard in one strategy or vintage year may be aggressive or outdated in another. Key areas families and their counsel typically examine include:

Families with sufficient committed capital may be able to negotiate side letters that improve economics or reporting terms. Smaller commitments may still benefit from MFN rights that automatically extend the best terms offered to any LP of a comparable size.

Operational Due Diligence: A Separate Track

Investment due diligence evaluates whether a manager can generate returns. Operational due diligence — frequently abbreviated ODD — evaluates whether the firm's infrastructure is sound enough to be trusted with capital at all. The two tracks should run in parallel, not sequentially.

ODD typically covers fund administration and valuation practices, cybersecurity and data controls, custodian and banking relationships, compliance programs, insurance coverage, and the quality of financial statement audits. A manager with a compelling investment thesis but weak operational controls presents risks that have nothing to do with market performance — misappropriation, regulatory action, and operational errors can each destroy value independently of how the underlying investments perform.

Families should also request references from current and former limited partners, not merely the names the manager volunteers. Speaking with investors who have experienced a full fund cycle — including the periods when distributions were slower than expected or when the manager faced portfolio stress — reveals far more than conversations with satisfied early backers.

A Question Bank for Manager Meetings

Sophisticated investors often arrive at manager meetings with a prepared set of questions. The following are examples of the kinds of inquiries families sometimes bring; this is not an exhaustive list, and a qualified adviser can help tailor questions to a specific strategy and situation.

• Walk me through the three deals in your track record where outcomes were most disappointing. What happened, and what changed as a result?
• Which partners on the current team led the deals that produced the top quartile of your historical returns?
• How has your sourcing strategy evolved, and what share of deals in your last fund came from proprietary versus intermediated channels?
• How do you value portfolio companies between transactions, and who reviews those valuations independently?
• What would cause a key-person event in this fund, and what happens next if one is triggered?
• Have any LPs from your prior funds declined to re-up, and are you willing to share why?
• How is carried interest distributed among the investment team, and how has that changed since your first fund?

Managers who answer these questions directly, with specificity and without defensiveness, are generally more trustworthy partners than those who deflect into marketing language. The quality of responses is itself a data point.