Last week we talked about the GP-LP relationship and briefly mentioned the LP’s diligence process. It felt worth unpacking that part a bit more. How do the world’s largest allocators actually decide which managers to back?
While every institution has its own nuances, most follow a similar sequence. You can think of the process in four broad steps.
1. First Engagement
There is no commitment if the LP never hears about the deal, right?
GPs usually start by sending a teaser deck with high-level information about a fund or co-investment. LPs do a quick screen to see whether the opportunity fits within their mandate.
An allocator may pass for many reasons that have little to do with the manager’s performance. Geography, sector exposure, strategy overlap, or liquidity terms might disqualify a fund immediately. Sometimes the LP’s program simply does not allow that type of investment, or the portfolio is already overexposed to a similar strategy.
2. Due Diligence
Once an LP shows interest, the deep work begins. Diligence typically happens along two tracks: financial and operational.
Financial Diligence (FDD) focuses on what the manager has achieved. LPs review historical performance, attribution, and cash flows, benchmark the results against peers, and test the repeatability of those returns.
Operational Diligence (ODD) examines how the firm runs behind the scenes. In some cases, an external advisor is engaged to perform this task. The goal is to evaluate governance, compliance, valuation policies, cybersecurity, and fund administration. They often meet the CFO or COO to assess internal controls and reporting discipline.
3. Decision
After diligence, the investment team compiles its findings and presents them to the investment committee (IC). The team summarizes why the manager fits, how the fund compares to existing exposure, and what risks it introduces or mitigates. The committee debates, challenges assumptions, and weighs the opportunity against available capital.
4. Legal and Closing
Once the committee approves the commitment, lawyers and external advisers step in. The LP negotiates the limited partnership agreement, focusing on economics, governance rights, reporting obligations, and any side letters that capture special terms.
When everything is signed, capital is called, and the real relationship begins.
If you are a GP, this process should feel familiar because it mirrors how you evaluate a company. The difference is that LPs operate one layer higher, and toggle between allocator and direct investor depending on the opportunity presented.