Investment Due Diligence
Trevor L Taylor is a Miami private investor and the founder of Fortius Capital, a vehicle that works through private transactions, and every private transaction raises the same practical question: what should be checked before money is committed? Investment due diligence is the name for that checking. It covers the people who will manage the money, the evidence behind their claims, the terms that decide who earns what, the route by which capital comes back, and the operational plumbing that keeps assets safe and reported honestly. Private markets make the work both more important and harder, because information is scarce, prices are not published daily, and a commitment often cannot be undone for years.
What a careful review covers
Large investors have tried to make the process consistent. The Institutional Limited Partners Association publishes a due diligence questionnaire meant to standardize the areas investors ask about when they review fund managers1, and revised it so that it reflects private markets as they now operate. A shared template saves time, but its real value is completeness: it reminds a reviewer of the questions that are easy to skip when a pitch is going well.
People come first for most professionals. In a survey of 885 institutional venture capitalists at 681 firms, Paul Gompers, Will Gornall, Steven Kaplan and Ilya Strebulaev found that investors see the management team as more important than product or technology2 when choosing where to put money, and that they credit the team with more of a deal’s eventual success or failure. Reviewing people means more than reading biographies. It means calling former colleagues and partners, asking how earlier projects actually finished, and understanding how the team is paid, since incentives shape behavior long after the first meeting.
The record needs the same scrutiny. Private fund returns are reported by the managers themselves, often on unsold holdings valued by estimate. Researchers summarizing work by Robert Harris, Tim Jenkinson and Steven Kaplan noted that uneven disclosure of private equity returns had raised questions about data quality3 for years. A careful reviewer asks for cash flow figures rather than headline percentages, checks how much of a record comes from a few exits, and compares results with what a simple public index would have earned over the same years.
Terms are where much of the value is decided. Ludovic Phalippou estimated that private equity funds returned about the same as public equity indices since at least 20064 while collecting large performance fees. CNBC explains that carried interest, the managers’ profit share, is typically 20 percent of a fund’s profits5. Reviewers add up every layer of fees, find the point where the profit split changes, and test what the manager earns if the investment merely returns capital. The entry on reading a private deal memo backward walks through those pages in detail.
Liquidity deserves its own line in any review. The Associated Press, reporting on moves to open retirement plans to private equity, noted that such assets tend to be locked up for years6 and cannot be sold in a day the way stocks can. The pace of cash coming back can slow just when investors need it. Bain found that distributions as a portion of net asset value fell to their lowest rate in over a decade7, so a review should model what happens if an exit takes several years longer than the plan assumes.
Operations close the list. Who holds the assets, who values them, who audits the statements, and how often investors receive reports are dull questions that protect against the worst outcomes. A strong investment idea attached to weak controls is a poor bargain. Reviewers ask for sample investor reports, confirm that an independent firm audits the accounts, and check how hard to value holdings are priced between sales. Where possible they confirm key facts directly with banks, administrators or auditors rather than relying on copies supplied by the manager.
Turning findings into a decision
Due diligence produces a pile of findings, and the hard part is weighing them. Many investors write a short memo that lists the reasons to proceed, the reasons to decline, and the specific conditions that would change the answer. Writing it down forces a reviewer to separate facts that were verified from claims that were merely repeated. Some teams score each area on a simple scale and require a minimum in every category, so that an exceptional record cannot hide a weak answer on fees or controls. Others assign one member to argue the case against, which surfaces doubts that a group excited by a deal might otherwise leave unspoken.
The wider environment belongs in that memo too. A deal can be sound on its own terms and still depend on conditions outside anyone’s control. The Federal Reserve warned that commercial property prices had stabilized while vulnerabilities from upcoming refinancing needs remained8, a reminder that any plan relying on new borrowing should be tested against tighter credit.
Good reviewers also look for what is missing. A gap in the record, a reference who cannot be reached, or a reluctance to share documents may say more than any slide. Some investors set firm rules in advance, such as declining any deal where the sponsor will not share full fee terms in writing, so that enthusiasm cannot override a basic standard. Others run a premortem, imagining the investment has failed and asking what most likely caused it.
None of this guarantees a good result. Markets move, plans slip and capable teams make mistakes. What diligence does is shift the odds and keep a record of why a decision was made, which makes later reviews honest. For a private investor facing a persuasive pitch, a written file of questions asked and answers verified is the most reliable defense available.
