Primary navigation:

QFINANCE Quick Links
QFINANCE Reference
Add the QFINANCE search widget to your website

Home > Asset Management Best Practice > Carrying Out Due Diligence on Private Equity Funds

Asset Management Best Practice

Carrying Out Due Diligence on Private Equity Funds

by Rainer Ender

Table of contents

Case Study

Fund Due Diligence for the MCAP Fund3

MCAP is a newly formed, European, first-time fund manager launching a €250 million fund specialized in development capital and small buyout investments in a single industry. The key person for the fund has deep industry experience. He successfully founded and grew a company operationally superior to more mature, competitive companies. Subsequently, the company was acquired by an international corporation, where he then became the CEO. After stepping down, he formed MCAP. Besides him, there are two other partners who also left their high caliber jobs to launch MCAP. The additional team members previously worked together in various positions; however, none of them has a track record as an investment professional.

A standard due diligence process focused mainly on the historic performance of the fund would pass on this fund after the first screening. The risk–return framework has a different approach:

  • The industry targeted by the fund is not covered by existing fund managers. The industry appears to be attractive for backing small, flexible, and dynamic companies with high technological and operational excellence. MCAP could, therefore, be a promising complementary investment.

  • The fund manager’s ingredients for success from a deal-sourcing and value-creation perspective are in place through the extensive networks of MCAP’s partners, and their in-depth industry expertise. Exit capability has only been proven in the sale to the international corporation; there is neither a proven track record, nor an established competitor. Nevertheless, the risk–return assessment framework can be applied to benchmark this new fund against other funds with a single industry focus. Reference calls are important sources for validating the reputation and the competency of MCP’s team.

  • Risk mitigation for the investor is the most challenging aspect of the due diligence in this case. The management firm is in formation, and the concept is to operate like an industry holding company, managing five investments with deep operational involvement. It is evident that the fund operation will be loss-making, and that the partners are pre-financing this initiative substantially. They are well aligned with the investors in the fund. Close interaction with the manager, and legal terms allowing intervention by investors, should MCAP drift off course, are prerequisites for reaching the level of comfort needed to make a fund commitment.


Private equity fund due diligence is a work-intensive undertaking. It requires a clear top-down assessment of investment segments and geographies that, based on fundamental drivers, appear attractive for investment. For the bottom-up fund manager evaluation, a proper due diligence process with clear milestones must be established. This process must be supported by tools that allow a structured assessment of a fund offering, and ensure comparability of different funds. When working in a broad team, special attention is also needed to make certain that all professionals apply the same framework, and that evaluations by different people lead to comparable results.

Finally, it must be emphasized that, while there appear to be many promising investment opportunities, the most important element for due diligence is to identify the risk behind each opportunity.

Making It Happen

The foundation of a successful due diligence process is a structured process, a proven evaluation framework, and an experienced team. Some valuable aspects are:

  • In-depth knowledge of past fund investments, their business and investment performance, and the fund manager’s value creation is crucial for the evaluation and the understanding of a private equity fund’s offering.

  • Broad sharing of the investment project work among all investment team members ensures the quality of the due diligence process, and a consistent investment philosophy across the firm.

  • Well-prepared reference calls provide an excellent perspective on how a fund manager creates value.

  • An experienced senior professional acting as devil’s advocate on an investment project provides valuable, internal challenging and risk mitigation.


1 Sood, Varun. “Investment strategies in private equity.” Journal of Private Equity 6:3 (Summer 2003): 45–47. Online at:

2 Mayer and Mathonet, 2005.

3 Fictitious fund example, based on actual cases.

Back to Table of contents

Further reading


  • Mayer, Thomas, and Pierre-Yves Mathonet. Beyond the J-Curve: Managing a Portfolio of Venture Capital and Private Equity Funds. Chichester, UK: Wiley, 2005.
  • Probitas Partners. The Guide to Private Equity Investment Due Diligence. London: PEI Media, 2005.


  • Kreuter, Bernd, and Oliver Gottschalg. “Quantitative private equity fund due diligence: Possible selection criteria and their efficiency.” Working paper. November 7, 2006. Online at:

Back to top

Share this page

  • Facebook
  • Twitter
  • LinkedIn
  • Bookmark and Share