Operational Due Diligence (ODD)
Operational due diligence (ODD) is the assessment of a manager’s operational infrastructure, controls, compliance, and risk management.
Allocator relevance: A core institutional filter—ODD failures can be disqualifying even when performance looks strong.
Expanded Definition
ODD evaluates whether a manager can safely and reliably handle LP capital: governance, valuation processes, trade operations, custody, cybersecurity, service providers, compliance program, and business continuity. Operational weaknesses can lead to misreporting, fraud risk, regulatory issues, or simply chronic friction for LPs.
For allocators, ODD is about avoiding non-investment risks that can still destroy outcomes.
How It Works in Practice
ODD includes DDQs, interviews, policy reviews, service provider checks, and sometimes on-site visits. Allocators assess who does what (GP vs administrator vs custodian), how controls are documented, and how exceptions are handled.
Decision Authority and Governance
ODD often sits alongside investment diligence and may have veto power. Governance frameworks define minimum operational standards and escalation for red flags.
Common Misconceptions
- ODD is only for large institutions.
- ODD is just “box checking.”
- Outsourcing to service providers eliminates operational risk.
Key Takeaways
- ODD protects against non-investment failure modes.
- Controls and clarity of responsibilities matter.
- Service provider quality is necessary but not sufficient.