Curated by: Rubric Advisors
Investing & Markets
Alternative Investment Due Diligence
A structured approach to evaluating private equity, venture capital, hedge fund, and real estate fund offerings before committing capital.
Alternative Investment Due Diligence
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Manager Track Record
- Review net-of-fee returns rather than gross returns, and compare to relevant benchmarks and vintage year peers
- Request audited financials and verify performance claims with the fund administrator independently
- Understand how returns are calculated, as IRR, MOIC, and TWR can tell very different stories
- Be aware of survivorship bias in reported industry averages, which may overstate typical performance
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Manager Track Record
- Review net-of-fee returns rather than gross returns, and compare to relevant benchmarks and vintage year peers
- Request audited financials and verify performance claims with the fund administrator independently
- Understand how returns are calculated, as IRR, MOIC, and TWR can tell very different stories
- Be aware of survivorship bias in reported industry averages, which may overstate typical performance
Fee Structure Analysis
- Management fees typically range from 1.5% to 2% of committed capital, charged regardless of performance
- Carried interest or performance fees are typically 20% of profits above a hurdle rate
- Watch for hidden fees such as transaction, monitoring, and portfolio company fees that add to total cost
- Total cost drag over the life of a fund can reach 5% to 7% annually when all fees are included
Fund Terms & Liquidity
- Capital call schedules and commitment periods typically span 3 to 5 years for private equity funds
- Fund life is generally 7 to 10 years with extension provisions, meaning capital may be locked up for a decade
- Distribution waterfall structures (European vs. American) determine how and when profits are returned
- Key person provisions and GP removal rights provide important investor protections worth reviewing
Operational Due Diligence
- Verify the fund uses an independent fund administrator rather than self-administering
- Confirm the fund is audited by a reputable independent auditor such as a Big 4 or well-known firm
- Review custody arrangements, compliance infrastructure, and regulatory registration history
- Conduct background checks on principals and review any disciplinary or legal history
Strategy & Portfolio Fit
- Evaluate whether the strategy fills a genuine gap in your existing portfolio allocation
- Consider the correlation with existing holdings and whether the fund truly adds diversification
- Compare risk-adjusted return assumptions against available public market alternatives
- Typical alternative allocations range from 5% to 20% of a portfolio, with vintage year diversification for PE and VC
Legal & Tax Review
- Review the Private Placement Memorandum and Limited Partnership Agreement thoroughly before investing
- Understand tax treatment including K-1 complexity, UBTI exposure, and potential state filing requirements
- ERISA considerations apply if investing through retirement accounts and may limit eligible funds
- Side letter provisions and most favored nation clauses may affect your terms relative to other investors
Red Flags
- Returns that are unusually consistent period after period may indicate valuation manipulation
- Reluctance to provide investor references, audited statements, or transparent reporting is concerning
- Excessive related-party transactions or a GP investing minimal personal capital alongside LPs warrant scrutiny
- High employee turnover, key person departures, or pressure to invest quickly without time for diligence are warning signs
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