Sharper questions, smarter allocations: evolving due diligence in private markets

While the benefits of private market allocations for building resilient, diversified portfolios are well established, the need for rigorous due diligence is amplified in a market where performance dispersion is wide and selectivity determines long-term value.

Due diligence should be forward-looking, challenging assumptions, and stress-testing narratives to ask what could go wrong, not just what has gone right. Further, it must adapt to address emerging dynamics, including how managers adapt to technological shifts such as AI adoption. This includes the growing role of data-driven insights in private market allocation, which increasingly shape decision-making frameworks. Considerations such as these are critical in private markets, where manager performance varies more than in public markets and illiquidity magnifies the consequences of poor diligence. Without it, investors risk being locked into a misaligned allocation for a decade. The process is about identifying managers equipped to outperform through the next market cycle.

What deserves a harder look

Manager risk

Investors often gravitate toward large, familiar managers, assuming rigorous diligence has already been completed or relying on the perceived safety of an established brand. However, amid elevated asset prices, compressed spreads, concentrated portfolios, and fractured political consensus, this assumption demands sharper scrutiny.

Manager alpha in private markets absolutely exists, across both established and emerging managers but isolating it can be challenging.

Key considerations when assessing manager risk:

• Operational resilience: governance, operational infrastructure, team depth, succession planning, internal controls
• Financial stability: balance sheet strength, use of leverage, ownership alignment
• Investment discipline: consistency of process, risk-adjusted performance, dispersion within strategy

Look for persistent edge

Moving from narrative comfort to analytical conviction requires evidence of durable advantage; an edge that persists across cycles, not just in strong market conditions.

Ask:

• Value creation: how has value been created across different market cycles?
• Market fit: has the thesis adapted, and is the current environment still supportive?
• Proof: how has this been demonstrated?

Understanding whether returns are the product of repeatable skill or one-off conditions is critical for long-term allocation decisions.

Persistent edge is not just about past performance; it is about adaptability. For example, narrow sector expertise can be a huge advantage whilst playing in that sector but can lead to costly misplaced assumptions when operating just outside of it. Disruption in infrastructure has exposed this; a manager with deep oil and gas experience may struggle to pivot into renewables, where investment dynamics, regulation, and technological risk differ. Volatility amplifies these divergences, raising the risk of style drift and unintended exposures. Some assets may appear cheap due to temporary dislocation, others because they are in structural decline. Due diligence must distinguish between the two.

Automation is not insight

AI has added complexity: useful for editing and communication, but problematic when it mimics conviction without substance. Investors must ask: where does human judgement begin, and who is actually making decisions?

AI’s impact spans:

• Deal origination: algorithms may give more weight to patterns over strategic fit
• Due diligence: algorithms may overlook qualitative signals such as culture, governance, or team cohesion
• Portfolio management and reporting: dashboards may exclude important metrics or rely on unverified data

Technology, therefore, can enhance processes – but also obscure accountability.

Beyond internal rate of return (“IRR”)

IRR has been the shorthand for private market performance, but it is flawed if used in isolation. Its sensitivity to cash flow timing, unrealistic reinvestment assumptions, and early-stage volatility make it prone to misinterpretation. For instance, two funds can post identical IRRs yet deliver vastly different outcomes.

Why IRR can mislead in the current market:

• Slower exits and elongated holding periods: reduce early cash flows, depressing IRR even for strong-performing assets
• Delayed distributions: make interim IRR look weak, masking underlying value creation
• Aggressive early drawdowns: inflate IRR before real performance delivers
• Reinvestment assumptions: are unrealistic in today’s lower liquidity environment
• Higher leverage: can boost IRR short-term but magnifies downside risk if valuations compress

To reduce misinterpretation, additional metrics such as MOIC, DPI, TVPI, MIRR, CAGR, PME, and peer rankings can provide a fuller view of value creation. This ensures alignment between managers and investors and reflects true economic outcomes.

Experience-led, process driven

In private markets, resilience comes from experienced teams supported by repeatable, transparent, and strong processes. Teams should navigate volatility with confidence, but judgement alone is insufficient; it must sit within a framework that is clear, consistent, and stress tested.

Why people and process matter now:

• Liquidity stress and exit delays: Requires seasoned judgement and structured portfolio liquidity models to manage investor expectations
• Valuation uncertainty: Pricing discipline, backed by process and past cycle experience, is essential in navigating valuation uncertainty
• Regulatory and geopolitical complexity: Sector exposure to geopolitical shifts demands leadership and processes that can flex across jurisdictions and regulatory regimes
• Tech and AI disruption: Teams that integrate technology intelligently need processes to ensure data-driven sourcing doesn’t compromise diligence
• Competitive deal environment: Proprietary sourcing? Networks help, but robustness of underwriting is key

Teams that combine judgement, adaptability, and process discipline tend to outperform through market shifts

Five questions investors should now ask differently

Asking better questions is the first step toward better outcomes. Here are five that, in our opinion, investors should now ask differently:

1. How resilient is the team and investment process under current market conditions – slower exits, valuation uncertainty, and regulatory complexity?
   Assess robustness of underwriting, cohesion, succession planning, and crisis-tested experience as key risk mitigants.
   
   
2. How has the manager responded to structural shifts – continuation vehicles, AI, and sector disruption, and what does that reveal about their strategic intent?
   Investors should assess whether these moves reflect conviction or convenience.
   
   
3. What structural changes have been made, and do they serve investor outcomes or manager convenience?
   Review continuation vehicles, fee resets, and liquidity innovations for alignment.
   
   
4. Where does technology enhance the process and where does it obscure accountability or introduce bias?
   Understand how AI is used in diligence, origination, and reporting, and who owns the decisions.
   
   
5. How are liquidity and governance managed in newer structures such as evergreen funds, ELTIFs (European Long-Term Investment Funds), and LTAFs (Long-Term Asset Funds)?
   Ensure alignment between manager incentives and investor expectations over the full lifecycle.

Private markets are not immune to risk; they simply make it harder to see

Where investments involve long hold periods and limited liquidity, due diligence becomes critical. It protects investors when narratives falter and ensures alignment over a decade-long horizon.

Effective frameworks combine institutional discipline with adaptability to emerging risks –because diligence must evolve at the same rate as the markets. In illiquid markets, the cost of getting it wrong is measured in years, not months.

Our approach reflects these principles. We draw on decades of private market experience and hundreds of manager reviews. We focus on uncovering both traditional risks and emerging challenges, helping investors move beyond narrative comfort to analytical conviction, supported by private market insights that deepen understanding of risk drivers and investment opportunity throughout the cycle.