What LPs check in operational due diligence, and what first funds usually miss
Operational due diligence used to arrive after a first close. For first-time managers raising now, it arrives before one.
Why the order changed
DRAFT — this section needs your read of the current market. The argument to make: when capital is harder to raise, LPs have more leverage, and they spend it on diligence. Operational questions that a manager could once answer during the first year now get asked before a commitment. What have you actually seen in the last two raises?
What the questionnaire asks
Most operational due diligence questionnaires cover the same ground, in roughly this order.
Segregation of duties
Who initiates a wire, who approves it, and can one person do both. This is the first question and the one that ends conversations fastest.
Fund administration
Which administrator, when they were appointed, and how often the books are reconciled against them. A manager keeping their own records without independent reconciliation is a finding.
Valuation
Who approves marks, what the policy says for hard-to-value positions, and whether anyone independent of the investment team signs off.
Audit
Which firm, how long they have been engaged, and whether any opinion has ever been qualified.
Cash and banking
Where cash sits, who has authority over it, and whether dual authorisation is enforced by the bank rather than by policy.
Related parties and conflicts
What the policy is, who decides when it applies, and where those decisions are recorded.
Continuity and key person
What happens operationally if the principal is unavailable for a month.
What first funds usually miss
DRAFT — this is the section only you can write, and it is the reason anyone would read the piece. From standing up two funds: which of the above was actually missing, what did the LP say, and how long did it take to fix? Specifics here are worth more than the whole section above.
What to have in place before you raise
DRAFT — the practical checklist, in the order you would actually do them.
Standing up a first fund's operations, or getting an existing set ready for diligence, is what this practice does. Book a call or write to hello@aubjfa.com.