What this module covers
Diligence on a private investment rests, in the end, with the investor. Dealers, regulators and managers each have obligations of their own, and none of them replaces the investor's own review of an offering. That review is a process of verification against documents and references. This module describes the five areas a due diligence checklist commonly covers, the approach with which the review is carried out, and the findings that diligence practice treats as reasons to stop.
The five areas
Diligence practice converges on five areas. On most checklists, an item that cannot be verified is a reason to stop.
| Area | What is verified |
|---|---|
| 1. Audited financial statements | Commonly at least three years, audited by an established firm |
| 2. Legal structure and compliance | Material contracts, litigation history, regulatory standing |
| 3. Track record and references | Realized returns rather than projections; earlier investors who can be contacted |
| 4. Fees and incentive alignment | Every fee and expense, and the total cost over the fund's life |
| 5. Liquidity and redemption terms | Lock-ups, gates, notice periods, and what happens under stress |