--- title: "Due Diligence | Altss Glossary" description: "Due diligence is the structured investigation an investor, lender or acquirer carries out before committing capital, to verify what it has been told,…" canonical: "https://altss.com/glossary/due-diligence" --- Glossary · Due diligence # Due Diligence Also called: DD In anti-money-laundering (AML) rules, customer due diligence (CDD) is a separate compliance concept concerned with who a customer and its beneficial owners are, covered under [KYC/AML](https://altss.com/glossary/kyc-aml), not the investment process described here. Due diligence is the structured investigation an investor, lender or acquirer carries out before committing capital, to verify what it has been told, identify the risks, and decide whether and on what terms to proceed. Publisher: Altss LLCPublished 2025-12-28Content modified 2026-10-01 ALTSS-DD-001 Before an LP commits to a fund, or a buyer agrees to acquire a company, it checks the facts: is the track record real, are the controls sound, do the contracts say what the seller claims, what could go wrong. Due diligence is that checking, organised into workstreams and written up so a committee can decide. It also shapes the terms: problems found in diligence become conditions, side-letter requests or a lower price. ## Two contexts: manager diligence and deal diligence **Manager (fund) diligence** is what an LP does before committing to a fund, a co-investment or a separately managed account. It asks whether the manager can repeat its results and will look after the LP's capital. Its core workstreams are investment due diligence and [operational due diligence](https://altss.com/glossary/operational-due-diligence) (ODD), plus legal and tax review of the fund documents. **Deal (transaction) diligence** is what a GP, acquirer or lender does on a company or asset. It asks whether the asset is worth the price and whether the risks are acceptable. Its workstreams are commercial, financial, legal, tax, technical and ESG, with specialist reviews (insurance, IT, environmental, regulatory) where relevant. The two meet when an LP diligences a co-investment or a GP-led secondary: the LP then reviews the GP's deal diligence as well as the GP. ## Workstreams | Workstream | Key question | Typical evidence | | --- | --- | --- | | Investment | Is the strategy sound and the track record repeatable? | Deal-level cash flows, [track record attribution](https://altss.com/glossary/gp-track-record-attribution), team history, portfolio reviews | | Operational | Are capital and information safe? | Policies, service-provider confirmations, audited accounts, controls reports | | Legal | Do the documents protect us? | Limited partnership agreement (LPA), side letters, private placement memorandum (PPM); for deals, contracts, title, litigation | | Tax | What tax leakage or exposure arises? | Structure charts, tax opinions, filings | | Commercial | Is the market and competitive position as presented? | Market studies, customer calls | | Financial | Are earnings, cash and debt as presented? | Quality of earnings, working capital and net debt analysis | | Technical | Will the asset or technology perform? | Engineering, IT and product reviews | | ESG | What environmental, social and governance risks exist? | Policies, incident records, metrics | | [References](https://altss.com/glossary/reference-checks) and background | Are the people who they say they are? | On- and off-list references, background and sanctions checks | ## How LP manager diligence usually runs Sequences differ by institution, but most follow a version of this path: - **Screening** against the mandate: strategy, size, fund terms, fit with the portfolio. - **First meetings** and review of the pitch book and PPM. - **[DDQ](https://altss.com/glossary/ddq) and [data room](https://altss.com/glossary/data-room) review.** The Institutional Limited Partners Association (ILPA) created its standard DDQ because lengthy, customised questionnaires that asked largely the same questions had become an administrative burden on LPs, GPs and placement agents. - **On-site or virtual meetings** with the investment team, operations staff and service providers. - **Track-record analysis** on deal-level cash flows: dispersion, loss ratio, attribution to current team members. - **Operational due diligence**, often by a separate team with its own sign-off. - **References and background checks**, including off-list references. - **Investment committee memo** and approval, often with conditions. - **Legal negotiation** of the [LPA](https://altss.com/glossary/limited-partnership-agreement) and side letters, then commitment. Diligence continues after commitment as monitoring, and again before a re-up, when it focuses on what has changed. ## Verifying, not collecting Diligence adds value when it tests claims against evidence the manager does not control. Common checks: - **Regulatory filings.** For US advisers, [Form ADV](https://altss.com/glossary/form-adv), searchable through the Investment Adviser Public Disclosure site of the Securities and Exchange Commission (SEC), shows ownership, disciplinary history and, for each private fund, its auditor, custodian, administrator and prime broker. Answers in the DDQ should match it. - **Third-party confirmations** from the fund administrator, auditor and banks. - **Audited financial statements** and capital account statements, reconciled to the reported track record. - **Off-list references** from former colleagues, co-investors, portfolio company executives and lenders. - **Sanctions screening** of the firm and principals against lists such as the Specially Designated Nationals list of the US Office of Foreign Assets Control (OFAC); see sanctions screening. Information the manager supplies without independent support is self-reported data; a good diligence file records which conclusions rest on it. ## Standards and templates Each investor's own policies set how it diligences a manager, and no single industry standard covers every workstream. Shared tools reduce duplication: - **ILPA Due Diligence Questionnaire 2.0** (November 2021) for private equity, covering 20 topics from firm and fund information to track record, valuation, ESG and diversity. - **Illustrative Questionnaire for the Due Diligence of Investment Managers** (2025 edition) of the Alternative Investment Management Association (AIMA), the first AIMA questionnaire to cover private credit and private equity managers as well as hedge funds. - **ILPA Principles 3.0**, built on alignment of interest, governance and transparency, used as a yardstick for fund terms. - After commitment, the [ILPA Reporting Template](https://altss.com/glossary/ilpa-reporting-template) standardises fee and expense reporting that diligence teams then monitor. ## Outputs and decisions Diligence ends in a documented recommendation: approve, approve with conditions, or decline. Conditions are common: a smaller commitment, side-letter rights such as most favoured nation (MFN) treatment or reporting undertakings, or remediation of an operational gap before closing. Many institutions give operational diligence an independent veto, so a strong investment case does not override an operational failure. ## Not the same as - [Due Diligence Questionnaire (DDQ)](https://altss.com/glossary/ddq): A DDQ is one input to diligence: the manager's written answers. Diligence is the whole investigation, including verifying those answers. - [Operational Due Diligence (ODD)](https://altss.com/glossary/operational-due-diligence): ODD is one workstream of manager diligence, focused on controls, service providers and operations rather than investment merit. - [KYC and AML](https://altss.com/glossary/kyc-aml): KYC/AML customer due diligence is a compliance process concerned with who a customer and its beneficial owners are. Investment due diligence is a voluntary process to decide whether to invest. - [Manager Selection](https://altss.com/glossary/manager-selection): Manager selection is the decision process across candidate managers; due diligence supplies the evidence for each candidate. ## Common mistakes - Treating DDQ answers as verified facts. - Relying only on references the manager selected. - Skipping or shortening operational diligence for small commitments or well-known managers. - Treating diligence as a one-off event rather than the start of monitoring. - Confusing AML customer due diligence with investment due diligence. - Recording conclusions without the evidence trail, which leaves the committee unable to see what was checked. ## Edge cases - Co-investments often come with short deadlines, so LPs rely partly on the GP's deal diligence and focus their own on the deal's fit and the GP's conflicts. - Secondary purchases of fund interests give limited access to underlying company information; diligence relies on GP reporting, valuations and sampling. - First-time and emerging managers have little or no fund-level track record; diligence turns to attribution of prior deals, references and the operating set-up. ## Questions ### How long does fund due diligence take? It varies with the LP's process, the manager's familiarity and the strategy's complexity. A re-up with a known manager is usually much shorter than a first commitment to a new manager, because diligence then focuses on what has changed. ### Who pays for due diligence? In manager diligence, each LP bears its own costs. In deal diligence, the fund usually bears third-party diligence costs as a fund expense, including on deals that do not close, as set out in the LPA. ## Sources - [ILPA Due Diligence Questionnaire 2.0 (and Diversity Metrics Template)](https://ilpa.org/wp-content/uploads/2021/11/ILPA-DDQ-2.0.pdf). Institutional Limited Partners Association, ILPA, Version 2.0, November 2021 (v1.1 dated October 2013). Status: Current (checked 2026-10-01). Overview (p. 3): purpose and the 20 topics — supports: Why ILPA standardised the DDQ; topics covered; not a required document - [AIMA Illustrative Questionnaire for the Due Diligence of Investment Managers (2025 edition)](https://www.aima.org/article/presenting-the-2025-edition.html). Alternative Investment Management Association, AIMA, 2025 edition (modular). Status: Current; full questionnaire available to AIMA members only (checked 2026-10-01). 2025 edition announcement — supports: AIMA DDQ scope extended to private credit and private equity managers - [ILPA Principles 3.0: Fostering Transparency, Governance and Alignment of Interests for General and Limited Partners](https://ilpa.org/wp-content/uploads/2019/06/ILPA-Principles-3.0_2019.pdf). Institutional Limited Partners Association, ILPA, Third edition, released 27 June 2019. Status: Current edition (no 4.0 found as of 2026-10-01) (checked 2026-10-01). p. 5 (Overview) — supports: Alignment of interest, governance and transparency as the three principles - [Form ADV Part 1A (paper version) - Uniform Application for Investment Adviser Registration and Report by Exempt Reporting Advisers](https://www.sec.gov/about/forms/formadv-part1a.pdf). U.S. Securities and Exchange Commission, SEC 1707 (07-24). Status: in force (checked 2026-10-01). Item 11 (disclosure information); Schedule A (owners); Schedule D, Sec. 7.B.(1), Questions 23-28 — supports: Ownership, disciplinary disclosures and private fund service providers reported on Form ADV - [Investment Adviser Public Disclosure (IAPD)](https://adviserinfo.sec.gov/). U.S. Securities and Exchange Commission, Live database (accessed 2026-10-01). Status: current (checked 2026-10-01). Public search — supports: Public access to Form ADV filings and adviser background - [Specially Designated Nationals and Blocked Persons List (SDN) - OFAC Sanctions List Service](https://sanctionslist.ofac.treas.gov/Home/SdnList). U.S. Department of the Treasury, Office of Foreign Assets Control, Live list (accessed 2026-10-01). Status: current (checked 2026-10-01). SDN list — supports: Sanctions list used in screening ## Related terms 11 terms - [Due Diligence Questionnaire (DDQ)](https://altss.com/glossary/ddq) - [Manager Selection](https://altss.com/glossary/manager-selection) - [Data Room](https://altss.com/glossary/data-room) - [Quality of Earnings (QoE)](https://altss.com/glossary/quality-of-earnings) - [Investment Committee](https://altss.com/glossary/investment-committee) - [Form ADV](https://altss.com/glossary/form-adv) - [Side Letter](https://altss.com/glossary/side-letter) - [Co-Investment](https://altss.com/glossary/co-investment) - [Re-Up](https://altss.com/glossary/re-up) - [Operational Due Diligence (ODD)](https://altss.com/glossary/operational-due-diligence) - [Reference Checks](https://altss.com/glossary/reference-checks) ## Referenced by 4 terms - [Blocker Corporation](https://altss.com/glossary/blocker-corporation) - [Cap Table (Capitalization Table)](https://altss.com/glossary/cap-table-capitalization-table) - [Corporate Carve-Out](https://altss.com/glossary/corporate-carve-out) - [Sustainable Finance Disclosure Regulation (SFDR)](https://altss.com/glossary/sfdr) ## Concept record Concept ID ALTSS-DD-001 Classification Due diligence Topics Due diligence Version 2.0.0 Last reviewed 2026-10-01 Structured data [JSON](https://altss.com/reference/concepts/due-diligence.json) ## Canonical URL https://altss.com/glossary/due-diligence