Operational Due Diligence: The GP Checklist Nobody Publishes

Operational due diligence on a general partner tests whether the manager's documents describe what the firm actually does. The investment case can be right and the operations wrong, and the SEC's examination record shows where that gap opens: valuation, fees, expenses, advisory committee consent and key person process. The checklist below, and the reference-call script that closes it, are the ones a manager should expect to answer.

01The Scope of Operational Due Diligence

Investment due diligence asks whether a strategy will produce returns. Operational due diligence asks whether the firm running it can be trusted to account for them: who holds the cash, who values the assets, who calculates the fee, who approves a conflict, and what happens when a named partner leaves. The questions apply to every strategy, including growth equity, where the manager typically holds minority positions.

The starting document for most limited partners is the due diligence questionnaire. ILPA released the DDQ 2.0 in November 2021 to standardize "the most frequent and important diligence questions," and its user guide states that the questionnaire is meant to minimize, not eliminate, variation in diligence, that additional questions belong in a separate document, and that emerging managers may lack answers that depend on predecessor funds (ILPA DDQ 2.0 User Guide).

A DDQ answer carries more weight than its format suggests. When the SEC's Division of Examinations reported advisers that did not follow the practices they had described to investors, it defined "fund disclosures" to include limited partnership agreements, private placement memoranda, side letters and "due-diligence questionnaires" (SEC Division of Examinations, Risk Alert, January 27, 2022). A questionnaire answer is a representation the manager will be examined against. Operational due diligence is the limited partner's version of that same examination, performed before the commitment rather than after it.

02The Regulatory Baseline

The first operational fact about any manager is its registration status, because most federal rules that structure fund operations apply by their terms only to an adviser "registered or required to be registered" with the SEC. A United States adviser that advises only qualifying private funds with less than $150 million in private fund assets is exempt from registration under Rule 203(m)-1 (17 CFR 275.203(m)-1) and files reports on Form ADV under Rule 204-4 (17 CFR 275.204-4). Three rules a limited partner may take for granted do not reach it.

• The compliance rule. Rule 206(4)-7 requires a registered adviser to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act, to review them at least annually, and to designate a chief compliance officer (17 CFR 275.206(4)-7).
• The custody rule's audit path. Rule 206(4)-2 lets a registered adviser to a pooled vehicle satisfy the custody rule through an annual audit by an independent public accountant registered with, and subject to regular inspection by, the PCAOB, with GAAP financial statements distributed to all limited partners within 120 days of fiscal year-end and an audit upon liquidation (17 CFR 275.206(4)-2(b)(4)).
• The marketing rule. Rule 206(4)-1 prohibits a registered adviser from presenting gross performance in an advertisement unless net performance appears with at least equal prominence, calculated over the same period and with the same methodology (17 CFR 275.206(4)-1(d)).

One antifraud rule reaches every manager regardless of status: Rule 206(4)-8 prohibits "any investment adviser to a pooled investment vehicle" from making a materially untrue or misleading statement to any investor or prospective investor (17 CFR 275.206(4)-8). For an exempt reporting adviser, an audit, a compliance program and net-of-fee performance presentation can therefore come only from the partnership agreement, a side letter or the manager's own voluntary practice.

Contract is also now the only route for protections that were briefly regulatory. On June 5, 2024, the Fifth Circuit vacated the SEC's Private Fund Adviser Rules in National Association of Private Fund Managers v. SEC, No. 23-60471; the SEC's notice lists the vacated provisions, including the private fund audit, quarterly statement, restricted activities and preferential treatment rules (SEC, Announcement Regarding Private Fund Advisers Rules). Quarterly fee reporting and side-letter disclosure are now negotiated terms, which makes them terms to verify.

Much of the verification is public. Form ADV Part 1A, Schedule D, Section 7.B.(1) asks, for each private fund, whether its statements are audited under U.S. GAAP, whether the auditor is PCAOB-registered and inspected, whether audited statements were distributed, whether every report carries an unqualified opinion, whether an outside administrator is used, and what percentage of assets by value was valued by a person who is not the adviser's related person (SEC Form ADV Part 1A, SEC 1707 (07-24)). The filings are searchable on the SEC's Investment Adviser Public Disclosure site, which makes reading them the cheapest step in the review.

03The Checklist

Each row names the document to request and what a clean answer looks like. The authority column cites the rule or published standard that the expectation rests on; it states no particular manager's terms.

The last row is specific to healthcare. A HIPAA covered entity must notify affected individuals of a breach of unsecured protected health information no later than 60 calendar days after discovery (45 CFR 164.404(b)). A manager holding digital health or diagnostics companies should learn of such an event within days.

04Valuation, Fees and Expenses

The SEC's examination staff has twice published the operational failures it finds most often at private fund advisers, and the overlap with a limited partner's checklist is nearly complete. The 2020 risk alert reported advisers that did not value assets according to their disclosed process, in some cases overcharging management fees and carried interest on overvalued holdings; advisers that charged funds for adviser expenses, such as personnel salaries, compliance, regulatory filings and office costs, that the fund documents did not permit; and advisers that did not disclose the role and compensation of "operating partners," leaving investors uncertain who bore that cost (SEC Division of Examinations, Risk Alert, June 23, 2020).

The same alert described advisers that disclosed fee offsets but had no procedure to track the portfolio company fees to be offset. That is a control failure, which is why the checklist asks for the offset ledger rather than the offset clause.

The 2022 alert extended the list: advisers that did not reduce the post-investment-period fee basis after selling, writing off or writing down part of an investment; undefined terms such as "permanently written down" applied inconsistently; inaccurate descriptions of recycling; funds extended without required approvals; conflicts brought to the advisory committee only after the transaction; and key person processes not followed after principals departed (SEC Division of Examinations, Risk Alert, January 27, 2022).

Reporting standards now make many of these items testable from a quarterly package. ILPA's updated Reporting Template, released in January 2025 for implementation beginning in the first quarter of 2026, breaks out internal chargebacks to identify expenses allocated or paid to the general partner or related persons and itemizes external partnership expenses against the general ledger (ILPA, Updated Reporting Template and New Performance Template). On valuation, the IPEV Board published its current guidelines in December 2022 for practitioners, investors, regulators and auditors (IPEV Board); the diligence question is whether one quarter's marks can be traced through whichever framework a manager names.

05Key Persons, Continuity and Data

A limited partner commits to people as much as to a strategy, and the key person clause lets the limited partner reconsider when the people change. ILPA Principles 3.0 states that key persons "should be the individuals that will determine the investment outcomes of the fund," not solely founders by title, that they should devote substantially all their business time to the fund and its strategy, and that limited partners should be notified immediately when the provision is triggered.

The Principles recommend that a key person or for-cause event automatically suspend the investment period, becoming permanent within 180 days unless a defined supermajority of limited partners votes to reinstate (ILPA Principles 3.0). These are recommended terms, not law; the task is to test whether the clause offered would fire on the departures that matter.

The same document recommends that the fund auditor serve the partnership as a whole rather than the general partner alone, and that the advisory committee see the management letter and may question the auditor directly.

Data security is now a written program. In May 2024 the SEC amended Regulation S-P to require covered institutions, including registered investment advisers, to maintain an incident response program "reasonably designed to detect, respond to, and recover from unauthorized access to or use of customer information," and to notify affected individuals no later than 30 days after becoming aware of a qualifying incident (SEC Press Release 2024-58). Limited partner bank details and tax identifiers sit with the manager and its administrator, so the checklist asks for the plan, its last test and the service providers it covers.

06The Reference-Call Script

Documents show the process a manager has written down. Reference calls show whether people outside the firm have watched it work. The script below is LeverVenture's own, written for calls with a manager's auditor or administrator contact, a former employee, a co-investor and a portfolio company chief executive. Each question asks for an event, which can be checked against the documents, rather than an opinion.

1. Describe the last time a valuation the manager proposed was challenged. Who challenged it, and what changed?
2. When the manager has made an error in a capital call, a distribution or a fee calculation, how did you learn of it, and how quickly was it corrected?
3. Who at the firm can move cash without a second signature?
4. When did the advisory committee last decline a request, or require a change to one before consenting?
5. Which person's departure would change how the firm makes investment decisions, and is that person named in the key person clause?
6. How are operating partners and other non-employee advisers paid, and has a portfolio company ever paid a fee that should have been offset?
7. What did the most recent management letter from the auditor say, and what did the manager do about it?
8. When a portfolio company had a regulatory problem, such as a data breach, an inspection finding or a reimbursement dispute, how soon did the manager know, and how soon did investors know?
9. Has the manager ever reported performance that it later restated, or excluded a fund or deal from its record? What was the reason?
10. If you were in a position to choose again, would you work with this firm on the same terms, and what would you change?

Ten questions fit a thirty-minute call. When two references describe the same event differently, that discrepancy is the next thing to examine.

07Frequently asked questions

What is the difference between operational due diligence and investment due diligence?

Investment due diligence tests whether a strategy can produce returns. Operational due diligence tests whether the firm running it accounts for those returns accurately: custody of cash, valuation, fee and expense calculation, advisory committee consent, compliance, key person continuity and data security. The SEC examines advisers against their questionnaire answers, so operational diligence checks the same representations before a commitment is made.

Does the SEC require every private fund manager to have an annual audit?

No. The custody rule's audit path in Rule 206(4)-2(b)(4) applies to advisers registered or required to be registered with the SEC. An exempt reporting adviser relying on Rule 203(m)-1 is outside it, and the separate private fund audit rule was vacated by the Fifth Circuit in June 2024. For those managers, an audit is a contractual term to negotiate and then verify.

What should a reference call on a fund manager cover?

Events rather than opinions: a challenged valuation, a corrected capital call or fee error, an advisory committee refusal, a portfolio company regulatory problem and how quickly investors heard of it, and any restated or excluded performance. Asking the same questions of an auditor or administrator contact, a former employee, a co-investor and a portfolio company chief executive makes the answers comparable.

Nothing in this piece is investment, legal, tax or accounting advice, and nothing in it is an offer to sell or a solicitation of an offer to buy any security.