Due Diligence
Due diligence is the structured process of evaluating an investment, manager, or counterparty to validate claims, risks, and fit.
Allocator relevance: The core mechanism allocators use to avoid preventable losses and to ensure mandate fit before committing capital.
Expanded Definition
Diligence covers investment process, track record, portfolio construction, operations, compliance, governance, and risk controls. In private markets, diligence also includes reviewing terms (LPA, side letters), valuation policy, service providers, and reference checks. The goal is to confirm that outcomes can be achieved through repeatable process—not just favorable timing.
Diligence quality is defined by what it catches: misalignment, hidden concentration, weak controls, inflated attribution, and inaccurate data.
How It Works in Practice
A typical diligence workflow includes initial screening, IC memo preparation, DDQ review, ODD, reference checks, and legal review of fund documents. Outputs are documented with assumptions and risk flags to support final approval.
Decision Authority and Governance
Diligence is governed by IC frameworks and internal policies defining required steps, decision thresholds, and documentation. Governance ensures diligence does not collapse under time pressure or relationship bias.
Common Misconceptions
- Diligence is a one-time exercise.
- Good performance reduces the need for diligence.
- DDQs alone are sufficient.
Key Takeaways
- Diligence validates process, controls, and truthfulness.
- Terms and governance matter as much as strategy narrative.
- Strong diligence is documented and repeatable.