Operational Due Diligence (ODD) Checklist Template

Start about ten weeks before the target commitment date. The first task names the four people and asks two questions: what kind of fund this is, and which regulators the manager is registered with or reports to. Every due date counts back from the commitment date, in working days.

• Set up the operational due diligence — the manager, the fund, the target commitment date (which every due date counts from), the kind of fund, the regulators the manager is registered with or reports to, and the four people; later tasks are assigned from these fields
• Agree the scope and the confidentiality terms with the investment lead — the firm and the fund in scope, any affiliated or sub-advisers, what the investment due diligence covers instead, whether an outside ODD provider does the work and its mandate in writing, the date the rating is needed, and the non-disclosure terms with the manager
• Send the DDQ and the document request list — the due diligence questionnaire the investor uses, the list of documents wanted with the answers, and a date for the replies
• Ask the manager to authorise its service providers to talk to you — a letter or email from the manager telling the administrator, the auditor, the custodian or prime broker and the fund’s counsel that they may answer the investor’s questions, with a named contact at each
• Set up the findings log — one log of every finding with its area, rating, the manager’s answer and what is still needed, kept up to date until the ODD rating

Read the DDQ answers, order the background checks early, then work out who owns and runs the firm, how decisions and conflicts are handled, and what the fund’s documents say about fees, expenses and investors’ rights.

• Check the DDQ answers and the documents received — every question answered or explained, the documents that arrived, the ones still missing, and answers that differ from the manager’s presentation or earlier funds
• Order background checks on the firm and its key people — the firm, its owners and the key people named in the fund’s documents: company records, court and regulatory records, media and sanctions searches, and the education and past employers in their biographies
• Map the firm’s ownership and legal structure — who owns the management company and the general partner, any outside or minority owner and what rights it has, and each entity in the structure (management company, general partner, fund vehicles, feeder funds) with where it is set up
• Review governance, key persons and succession — the management committee and other committees, who decides what, independent directors on the fund’s board where there is one, the key persons named in the fund’s documents and what happens if one leaves, and the succession plan
• Review the operations team and the separation of duties — the chief operating officer, finance and operations staff, their backgrounds and how many there are for the size of the business, and who can trade or make investments, record them, value them and approve payments
• Review conflicts of interest and how deals and costs are shared — the conflicts policy, how investment opportunities and co-investments are allocated between funds and accounts, how shared costs are split, transactions with related parties, and the conflicts the manager has disclosed
• Review the fund’s terms and documents — the limited partnership agreement or offering documents and the subscription agreement: fees, carried interest or performance fee, the expenses the fund pays, the manager’s own commitment, key-person and removal terms, the advisory committee, reporting and transfer terms, and the side letters the manager says exist
• Check the fund’s expenses against its documents — which costs the fund pays and which the manager pays, how shared costs are allocated, and a sample of recent fund expenses traced to what the documents allow

How the fund’s assets are valued and by whom, what the administrator does and does not do, who can move the fund’s money, and what the audited accounts say.

• Review the valuation policy and who applies it — the written valuation policy, the valuation committee and its members, the methods for each type of asset, the part played by the administrator or an outside valuation firm, and how overrides are approved and recorded
• Test the valuation of a sample of positions — for a few positions, the value reported to investors against the policy, the inputs and evidence behind it, and who approved it
• Review the fund administrator’s role — whether the administrator is independent of the manager, what it does (the books, the net asset value or capital accounts, investor statements, checks on investors, payments), what the manager keeps in house, and the administrator’s independent controls report where it has one
• Review cash controls and how payments are authorised — bank accounts held in the fund’s name, who can open accounts and move money, how many people must authorise a payment, call-back checks on new or changed bank details, the administrator’s part in releasing payments, and how money in and out from investors is handled
• Review the books, the audited financial statements and the auditor’s opinion — the fund’s latest audited financial statements, the auditor’s opinion and any qualification, any recent change of auditor, and how long after the year end the accounts reached investors

How the fund’s investments are made, recorded, settled and reported. The kind of fund on the first task decides which tasks show: deal closing, capital calls and borrowing for a private markets fund, or trading, reconciliations, counterparties and redemptions for a hedge fund. Investor reporting applies to both.

• Walk through how a deal is closed and funded — the approvals needed before a deal closes, who instructs the payment, how money moves from the fund to the seller or an escrow account, and how the fund’s ownership of the investment is recorded
• Review the capital call and distribution process — how calls and distributions are calculated, checked, approved and sent, who checks the administrator’s figures, and how investors are told the bank details for a call
• Review the fund’s credit facilities and borrowing — any subscription line or other borrowing by the fund, who may draw on it, what it is used for, and how its use is shown to investors
• Walk through the trade lifecycle — how orders are placed, executed, allocated between funds and accounts, confirmed and settled, and who can change a trade after it is booked
• Review the reconciliations of positions and cash — how often positions and cash are reconciled between the manager, the administrator and the prime brokers or custodians, who reviews the breaks, and how old the open ones are
• Review counterparties, margin and trade errors — how prime brokers and trading counterparties are approved and monitored, who authorises margin and collateral moves, the trade error policy, and the recent errors and who paid for them
• Review the redemption terms and liquidity management — notice periods, lock-ups, gates, side pockets and the power to suspend redemptions, how the manager matches the portfolio’s liquidity to them, and any time these terms were used
• Review investor reporting — what investors receive and when (quarterly reports, capital account or account statements, the audited accounts), who prepares them, and how the figures are checked before they go out

Check the compliance programme, look the manager up on the public register of each regulator ticked on the first task, and ask about exams, lawsuits, anti-money laundering checks and insurance.

• Review the compliance programme — the compliance officer, their reporting line and other roles, the compliance manual, the code of ethics, personal trading, gifts, inside information, the testing plan and the latest annual review
• Check the manager’s Form ADV on the SEC’s adviser search — on the SEC’s Investment Adviser Public Disclosure site: whether the firm is registered or an exempt reporting adviser, its owners, its disciplinary disclosures, the private fund section with the service providers it lists, and, for a registered adviser, its brochure (Part 2A). An exempt reporting adviser completes only some items of Part 1A and no brochure
• Check the manager and its people on the FCA register — on the FCA’s Financial Services Register: the firm’s status and permissions, the individuals shown for it, any disciplinary history, and that the details match the firm you are dealing with
• Check the manager on its other regulators’ registers — the regulator named in the DDQ, the firm’s entry on its public register, the licence or registration type, and any public enforcement action
• Review regulatory exams, lawsuits and investigations — the latest examination or inspection by each regulator and what it found, what the firm fixed, and past or pending lawsuits, investigations and regulatory actions against the firm and its people
• Review anti-money laundering checks on the fund’s investors — who carries out the know-your-customer and anti-money laundering checks on the fund’s investors (the manager or the administrator), sanctions screening, and the anti-money laundering rules the firm and the fund fall under
• Review the firm’s insurance cover — the types of cover the firm holds (the ILPA DDQ’s examples are fidelity bond, errors and omissions, directors’ and officers’ and cyber), the limits, who is covered and whether the fund or the manager pays the premiums

How the firm protects its systems and data, what has gone wrong before, which systems and providers it depends on, and how it would keep running if its office or main systems were unavailable.

• Review the cyber and information security policy — the policy and the standard it follows, who approved it and when it was last reviewed, independent testing of it, multi-factor sign-in and access controls, and the checks that stop a fraudulent payment request by email
• Review cyber incidents and data breaches — incidents and breaches at the firm in recent years, what happened, who was told, and what changed afterwards
• Review the main systems and technology providers — the portfolio, accounting and investor systems, spreadsheets that hold key figures, outsourced IT and cloud providers, and how the manager checks the providers it depends on
• Review the business continuity and disaster recovery plan — the plan, the latest test and its results, cover for key people, and how the firm would keep investing, paying, valuing and reporting if its office or main systems were unavailable

Hear from each service provider yourself, using contact details you have checked, and compare what they say with the DDQ, the fund’s documents and the regulator’s records.

• Confirm the administrator’s role directly — that it is appointed to the fund, the services it provides, whether it releases or approves payments, whether it sends statements to investors, and anything it raises about the manager
• Confirm the auditor’s appointment directly — the firm and office that audits the fund, the years it has audited, the opinion on the latest accounts, and its registration where the rules need one
• Confirm the custodian or prime broker directly — which custodians or prime brokers hold the fund’s assets, that the accounts are in the fund’s name, and where a private fund’s ownership of its investments is recorded
• Confirm the fund’s legal counsel — the law firms acting for the fund and the manager, what they advised on, and whether any of them also acts for investors in the fund
• Compare the confirmations with the DDQ and the public records — every service provider named in the DDQ, the fund’s documents, the regulator’s records and the confirmations; a provider that differs or does not confirm goes in the findings log

Meet the people who run operations, finance, compliance and technology, see the controls work, review the background checks and references, send the follow-up questions, and record whether there is a red flag.

• Plan the onsite or virtual visit — the date, whether it is in person or by video, who you meet (operations, finance, compliance, technology), the walkthroughs and samples you want to see, and the questions held back from the DDQ
• Hold the visit and walk through the controls — meet the operations, finance, compliance and technology leads, see the main systems working, follow one payment, one valuation and one trade or capital call from start to finish, and check what you hear against the DDQ
• Review the background check results — each result against what the firm and its people disclosed in the DDQ and the regulator’s records; anything not disclosed goes in the findings log
• Take references on the manager — other investors in the manager’s funds, former colleagues and service providers, including at least one reference the manager did not name
• Write up the visit and send the follow-up questions — the visit notes, the differences from the DDQ, the follow-up questions sent to the manager with a date for answers, the answers added to the findings log, and whether the review has found a red flag

Deal with any red flag, write the ODD report, get the rating before the commitment, and set the date and the triggers for the next review. Nothing after the rating task can be completed until it is done.

• Escalate each red flag to the investment lead — what was found, where, why it matters, what the manager has been asked, and whether the commitment date needs to move
• Ask the manager to fix or explain each red flag — the manager’s answer, the fix it offers and by when, the evidence that the fix is made, and whether the answer changes the rating of the finding
• Write the ODD report — each finding by area with its rating and the manager’s answer, what is still open, the conditions proposed, the date of the information reviewed, and the recommended rating
• ODD approver records the ODD rating — the approver reads the report and records approve, approve with conditions, or reject before the commitment; nothing after this task can be completed until it is done
• Record the rejection and close the review — the reasons, the investment lead and the committee told, the manager told as agreed, the manager’s documents returned or destroyed under the non-disclosure terms, and the tasks that no longer apply marked not applicable
• Agree the conditions with the manager — each condition the rating named, how it is met (a side letter term, a fix before the commitment, a report the manager will send), who checks it, and the manager’s agreement
• Give the ODD rating to the investment committee — the rating, the conditions and how far each is met, the findings still open, and the report, with the investment team’s recommendation
• Set the monitoring date and what to watch — the date of the next operational review, the events that bring it forward (a key person leaving, a change of administrator or auditor, a regulatory action, a breach, a qualified audit opinion), and the open conditions to follow up