Investment Due Diligence Checklist

Record the issuer or manager name, asset class (private equity, hedge fund, interval fund, non-traded REIT, direct operating company), proposed allocation size, and which client segments would receive the recommendation. The lead analyst owns this; the CIO will reference it at IC.

Flag whether the offering will be recommended to retail accounts (Reg BI / Form CRS in scope) or restricted to accredited / qualified purchaser clients only. Restricted offerings still need diligence but the downstream Reg BI rationale documentation differs.

Create the matter folder in NetDocuments / ShareFile / Box per firm convention. All PPMs, audited financials, manager correspondence, and IC memos belong here — not in advisor inboxes. Books-and-records retention starts now.

Pull audited statements from a PCAOB-registered or recognized national auditor. If the target only offers reviewed or compiled financials, escalate — that's a material diligence gap for any allocation above your firm's threshold.

Build the three-to-five year revenue, EBITDA, gross margin, and operating margin trend in your model. Note one-time adjustments and addbacks; aggressive addback culture is a common red flag in lower-middle-market diligence.

Compare operating cash flow to reported EBITDA. Look for working capital build that flatters earnings, capitalized expenses, and aggressive revenue recognition. Free cash flow conversion under 60% of EBITDA needs an explanation in the IC memo.

Run a base / downside / severe-downside scenario against management's forecast. Document the assumptions you change (revenue growth, margin compression, working capital). The CIO will want to see what happens in the downside, not just the base case.

Map maturities, rates (fixed vs. floating), and financial covenants (leverage, coverage, liquidity). Floating-rate exposure with thin coverage is the failure mode most commonly missed in 2022-vintage allocations.

Pull BrokerCheck / IAPD records on each registered principal, plus a third-party background screen (LexisNexis Bridger, Refinitiv World-Check) for civil judgments, bankruptcies, and regulatory actions. OFAC screen all named principals.

Use the firm's standard management interview script. Cover succession, compensation alignment, capital allocation philosophy, and prior fund / venture outcomes. Document direct quotes — the IC will want to see how management actually answered, not your paraphrase.

Map the org chart and identify any single point of failure. For a private fund, key-person clauses and replacement triggers are non-negotiable. For an operating company, ask what happens if the founder leaves in 18 months.

Confirm separation of duties between portfolio management, trading, valuation, and back office. For private funds, verify the administrator and auditor are independent third parties — not affiliated entities. Self-administered funds with self-valued illiquid positions are the Madoff template.

Identify direct competitors, substitutes, and the target's relative positioning on price, product, and distribution. Pull industry reports from Bloomberg, FactSet, YCharts, or Morningstar Direct for the IC memo appendix.

Reconcile management's TAM claim against independent third-party sources. A TAM that requires the target to take 30%+ share of a defined market is a red flag — most lower-middle-market companies cap at 10-15% of any defined niche.

Speak with three to five customers, including at least one churned customer if available. Management-curated reference lists are useful but never sufficient — source one or two references independently through your network.

Test the moat narrative against actual evidence: switching costs, network effects, IP, regulatory licenses, scale economics. A claimed moat that doesn't show up in pricing power or retention is marketing.

For a manager: pull current Form ADV Parts 1 and 2A, check IAPD / CRD for disclosures, and confirm registration is active in every state of business. For an issuer: confirm the offering exemption (Reg D 506(b) / 506(c), Reg A+) and any state blue-sky filings.

Pull PACER and state court records for the entity and named principals. Settled cases are often more revealing than dismissed ones — read the underlying complaint, not just the docket summary.

Confirm IP ownership (no trailing assignments), check for prior data breaches (state AG notifications), and review SOC 2 or equivalent attestation if the target handles sensitive data. GLBA-relevant for any financial counterparty.

Document the fee load: management fee, performance fee, placement fee, 12b-1, share class. Reg BI and DOL PTE 2020-02 require best-interest documentation; a higher-fee share class without a clear client benefit will not survive the IC's fiduciary review.

Complete the firm's standard risk matrix: financial, operational, market, regulatory, liquidity, valuation, and concentration. Each category gets a 1-5 score with written justification. Anything scoring 4 or 5 needs a documented mitigant.

Document the redemption schedule, gates, side-pocket rights, and lock-up. Match against the liquidity profile of the client segments who will hold this. Illiquid alternatives in client portfolios with near-term cash needs is the most common suitability failure on alts.

Use the standard IC memo template: thesis, key risks, fee analysis, return expectations, recommended sizing, and dissenting analyst views. The memo becomes part of the books-and-records file regardless of the IC outcome.

The CIO records the IC's decision, vote count, conditions of approval, and approved sizing. A conditional approval should list the specific items the analyst must close before any client allocation occurs.

For conditionally-approved investments, the lead analyst documents resolution of each named condition and re-circulates to the CIO before the first client allocation is placed. Until conditions close, the investment stays off the approved list.

Write a one-page rejection memo for the books-and-records file. Even rejected diligence has audit value — it documents the firm's process and protects against future selection-bias claims.