Limited Partners (LPs) are increasingly conducting operational audits and diligence reviews, not just during fundraising, but throughout the life of a fund. These reviews go beyond performance and strategy, probing into the fund’s operational infrastructure, controls, and service provider relationships. For fund managers and administrators, being prepared isn’t just about having the right documents, it’s about demonstrating a culture of operational discipline.
What LPs Are Looking For
Operational diligence reviews typically focus on:
Governance and Oversight: Who is responsible for key decisions? Are there documented policies and escalation procedures?
Valuation and NAV Controls: How are assets valued? Are there independent checks and reconciliations?
Cash Movement and Controls: Who initiates and approves wire transfers? Are dual controls in place?
Service Provider Oversight: How is the administrator monitored? Are SLAs tracked and reviewed?
Cybersecurity and Data Protection: Is there a formal cybersecurity program? How is investor data safeguarded?
Compliance and Regulatory Readiness: Are filings timely and accurate? Is there a compliance calendar?
LPs may also request walkthroughs of capital call processes, subscription procedures, and audit readiness protocols.
How to Prepare Proactively
Rather than scrambling when a diligence request arrives, fund managers and administrators can take several steps to stay ready:
1. Maintain a Diligence Folder
Create a centralized repository with:
Org charts and governance documents
Valuation policies and procedures
Sample capital call notices and investor communications
SOC 1 reports and cybersecurity summaries
Administrator SLAs and oversight logs
Update this folder quarterly to ensure it reflects current practices.
2. Conduct Internal Mock Reviews
Simulate an LP audit with your team or a third-party consultant. Identify gaps in documentation, unclear processes, or areas where controls are informal or undocumented.
3. Formalize Oversight of Service Providers
Even if your administrator is excellent, LPs want to see oversight. Document periodic reviews, issue logs, and escalation paths. Include administrator performance in quarterly board materials.
4. Invest in Cybersecurity Hygiene
Even basic steps, like MFA enforcement, phishing training, and vendor risk assessments, can go a long way. LPs increasingly ask for evidence of cybersecurity programs, not just policies.
5. Train Your Team
Ensure that investor relations, operations, and finance staff understand the fund’s control environment and can speak confidently about their roles. LPs often interview staff during diligence.
Common Pitfalls to Avoid
Overreliance on the Administrator: LPs expect the GP to own oversight and controls, not outsource them entirely.
Inconsistent Documentation: Policies should match actual practices. If you say you reconcile cash daily, be ready to show it.
Reactive Communication: LPs appreciate proactive updates when issues arise. Silence or delay can erode trust.
Final Thoughts
Operational audits and LP diligence reviews are no longer rare events, they’re part of the ongoing relationship between fund managers and their investors. Being prepared isn’t just about checking boxes, it’s about building trust through transparency, consistency, and control.