Operational Due Diligence: What LPs Actually Check Before Wiring Capital to an Emerging Manager

Operational risk, not bad stock picks, causes roughly half of all fund failures according to a landmark 100-fund study by Capco. In 2026, 87% of institutional LPs surveyed by Altss said they had rejected a manager over operational concerns alone, even when the investment thesis checked out. For emerging fund managers, that means the back office you build before your first close matters as much as your track record.

Every emerging manager pitch deck leads with returns: gross IRR, net multiple, deal-by-deal attribution. But the limited partners writing the actual checks spend most of their diligence time somewhere else entirely. The Institutional Limited Partners Association's DDQ 2.0 runs to dozens of pages and asks almost nothing about deal sourcing. It asks who administers the fund, who can move cash, what happens if the general partner is hit by a bus, and whether the firm has ever had a cybersecurity incident.

This is operational due diligence, usually shortened to ODD, and it is the gate that sits between "we like your thesis" and "we're wiring the capital." For an accredited investor deciding whether to commit to a first-time fund, ODD is the discipline that catches problems before they become losses. For the emerging manager on the other side of the table, it is the checklist you should be building your firm around from day one, not the pop quiz you scramble to pass after an LP asks for a reference on your fund administrator.

What ODD Actually Verifies (It Is Not Just a Background Check)

Investment due diligence asks whether the manager can pick good deals. Operational due diligence asks whether the firm around that manager can be trusted to safeguard, account for, and eventually return the money. Those are different questions, and institutional allocators have learned the hard way that a brilliant investor sitting on top of a broken back office is still a bad bet.

A Capco study that examined roughly 100 hedge fund failures over a 20-year period found that operational risk alone accounted for about 50% of failures, compared to 38% for pure investment risk. Misrepresentation or misappropriation of fund assets showed up in 85% of the operational-failure cases the study reviewed. Put simply: more funds have died from someone quietly moving money than from someone making a bad trade.

A serious ODD review typically covers seven areas. Each one maps to a specific way capital can go missing or a fund can blow up operationally rather than strategically.

ODD Area	What the LP Is Checking	Red Flag for Emerging Managers
Fund administrator	Independent, reputable third party calculates NAV and reconciles cash. No self-administration.	GP calculates its own NAV in-house or uses an unknown, unregistered administrator.
Valuation policy	Written policy, independent inputs for illiquid assets, consistent methodology across cycles.	No written policy, or valuations set unilaterally by the GP with no outside check.
Cybersecurity	Data encryption, access controls, incident response plan, insurance coverage.	No documented policy, personal email used for LP data, no cyber insurance.
Key-person risk	Succession plan, key-person clauses in the LPA, depth beyond the founder.	Single point of failure with no contingency language in the fund documents.
Compliance / Form ADV	Registration status, disciplinary history, conflicts-of-interest disclosures.	Undisclosed regulatory actions or a materially incomplete ADV.
Cash controls	Segregation of duties, dual signatures on wires, bank reconciliation cadence.	One person can both initiate and approve a wire.
Insurance	E&O, D&O, and fidelity bond coverage appropriate to fund size.	No coverage, or coverage limits far below assets under management.

The common thread across all seven: separation of duties. No single person at the firm, including the founder, should be able to value the fund, move the cash, and report the results without an independent party checking the work at each step. That is the single sentence an emerging manager should tape above their desk.

The Fund Administrator Question LPs Ask First

Ask an experienced LP what the first ODD question is, and most will say: "who is your fund administrator, and can I call them?" The reason is simple. A reputable, independent administrator is the outside party who confirms the numbers in the GP's investor letter actually match the bank statements and the portfolio records. Without one, the LP is trusting the GP's own math about the GP's own performance. Cambridge Associates found that third-party fund administrator usage among the managers it reviewed rose from 65% in 2018 to 83% in 2024. That is not a stylistic preference. It reflects institutional LPs increasingly treating self-administration as a disqualifying answer, not a minor deduction. For an emerging manager still deciding where to spend limited operating budget, an administrator relationship, even a modest one, is often a better return on that dollar than another data subscription or a nicer office.

The ILPA DDQ 2.0: The Actual Document LPs Are Filling Out

Most institutional LPs, and an increasing number of sophisticated individual investors and family offices, now work from a version of the ILPA Due Diligence Questionnaire, known as DDQ 2.0. It standardizes the questions across the industry so LPs are not reinventing a diligence process for every new fund, and so GPs eventually only have to answer the same battery of questions once rather than a different bespoke version for each prospective investor. The document runs across roughly six sections: firm overview and organization, investment strategy, fund terms and structure, risk management, ESG and responsible investment where applicable, and operations, valuation, and compliance. It is the last section where emerging managers most often stumble, because it asks for specifics: named administrator, named auditor, valuation committee composition, business continuity plan, cybersecurity policy, and a description of how the firm segregates cash-movement duties. According to Altss's 2026 survey of 1,200 institutional investors, the average DDQ has grown to roughly 23 sections and more than 280 individual questions. That is not a form a manager fills out the week before a first close. It is a form a manager should be able to answer from muscle memory, because the underlying policies already exist in writing.

Case Study: GPB Capital and What Happens When ODD Gets Skipped

GPB Capital Holdings is the case every emerging manager and every LP should study, because it shows what operational failure looks like once it stops being hypothetical. GPB raised money from retail and accredited investors through a network of independent broker-dealers to buy auto dealerships and other cash-flowing businesses, then allegedly used new investor money to pay distributions to earlier investors when the underlying businesses could not generate enough cash on their own. Federal prosecutors and the resulting court filings describe an alleged $1.7 billion scheme that touched roughly 17,000 investors before it collapsed. GPB's founder, David Gentile, and other executives faced criminal charges tied to the fraud. What makes GPB an operational due diligence case, rather than simply a fraud case, is where the failure actually lived. The selling broker-dealers who distributed GPB's funds to their clients did not independently verify the distribution math against the underlying businesses' actual cash flow. Investors and their advisors relied heavily on GPB's own representations about performance rather than demanding the independent administrator and auditor confirmation that ODD frameworks exist to require. The SEC's own OCIE division had already flagged this exact gap years earlier in its Risk Alert on adviser due diligence for alternative investments, which specifically called out reliance on unverified GP-reported performance as a recurring examination finding. GPB is the fact pattern that alert predicted, playing out at scale. For an investor, the lesson is not "avoid smaller funds." It is: verify the fund administrator and auditor directly, in writing, before wiring capital, regardless of how compelling the fund manager sounds on the phone. For an emerging manager, the lesson is: if your firm cannot produce the paperwork an independent administrator and auditor would generate, you are not ready to take institutional capital, no matter how good your deal pipeline looks.

What Could Go Wrong: The Limits of ODD Itself

Operational due diligence reduces risk. It does not eliminate it, and both audiences should hold that plainly. A fund can check every box on the ILPA questionnaire, have a name-brand administrator, and still deliver poor investment returns. ODD says nothing about whether the strategy itself will work in a given market. Sophisticated fraud can also survive a surface-level ODD process for a period of time if the administrator relationship is real but the underlying reporting to that administrator is falsified, which is closer to what investigators allege happened at points inside GPB's structure. ODD also has a cost problem for emerging managers. Building the policies, hiring a fund administrator, and carrying adequate insurance can run into real money for a first-time fund with a small management fee base, sometimes tens of thousands of dollars annually before the fund has any assets generating fees to cover it. That is a genuine tension: LPs want institutional-grade operations, but institutional-grade operations are expensive to build before institutional-scale capital arrives. Emerging managers navigate that gap by phasing in infrastructure, starting with the highest-risk items first: independent administration and segregated cash controls, before layering in more elaborate compliance programs as assets under management grow.

A Practical Checklist for Both Sides of the Table

For the accredited investor evaluating a commitment, a working ODD checklist should include direct verification, not just a review of what the GP submitted. Confirm the fund administrator by contacting them independently, not through a number or email the GP provides. Request the most recent Form ADV directly from the SEC's own database rather than relying on a PDF the GP sent. Ask for the written valuation policy and who sits on the valuation committee. Ask who at the firm can independently move cash out of the fund's bank account, and whether that requires two signatures. Confirm cyber and fidelity insurance coverage amounts against fund size, and ask about the succession plan if the lead investor became unavailable. For the emerging manager preparing for a first close, the same list becomes a build plan rather than a test. Engage an independent, recognized fund administrator before you approach institutional LPs, not after one asks. Write down your valuation policy in a document you can hand over, even if the fund only holds a handful of positions today. Put a real cybersecurity policy and incident-response plan in writing, and buy cyber coverage sized to the data you actually hold. Address key-person risk explicitly in your limited partnership agreement rather than leaving it implied. File a complete, accurate Form ADV and keep it current. Separate who approves a wire from who initiates it, even at a two-person firm, using your bank's dual-authorization controls. Carry E&O and D&O coverage before your first LP asks whether you have it.

Why This Matters More for Emerging Managers, Not Less

There is a temptation among first-time managers to treat operational infrastructure as something to build later, once the fund has scale and fee income to pay for it. The ODD data argues the opposite. Established managers with long track records get some benefit of the doubt on operations because LPs have years of clean audited statements to point to. Emerging managers have no such cushion. The 87% rejection rate Altss found in 2026 is not evenly distributed. It falls hardest on first-time and second-time funds, precisely because there is no performance history to offset an operational question mark. That is also the opportunity. A first-time manager who walks into an LP meeting with a signed administrator agreement, a written valuation policy, and a clean Form ADV is answering the DDQ 2.0 before it is even asked. That does not replace a good track record or a coherent strategy. But it removes the single most common reason capital walks away from an otherwise fundable manager.

Frequently Asked Questions

What is operational due diligence in private funds?

Operational due diligence, or ODD, is the review LPs conduct of a fund's back-office infrastructure, including its fund administrator, valuation policy, cybersecurity, compliance filings, cash controls, and insurance, separate from any review of the manager's investment strategy or track record.

What is the ILPA DDQ 2.0?

The ILPA DDQ 2.0 is a standardized due diligence questionnaire published by the Institutional Limited Partners Association that LPs use to evaluate private fund managers across firm organization, strategy, fund terms, risk management, and operations, so managers answer a consistent set of questions rather than a different form for every investor.

Why do LPs care so much about the fund administrator?

An independent fund administrator confirms that a fund's reported performance and cash positions match its actual bank records and portfolio holdings, rather than relying solely on the general partner's own reporting, which is the gap that contributed to losses in cases like GPB Capital.

Can a fund with a strong track record still fail operational due diligence?

Yes. ODD evaluates the firm's infrastructure and controls independently of investment performance, so a manager with excellent returns can still be rejected if the fund lacks an independent administrator, a written valuation policy, adequate cash controls, or a current Form ADV.

Further Reading

• ILPA DDQ 2.0 User Guide
• SEC EXAMS: Observations from Examinations of Private Fund Advisers
• Avantia Law: survey of 150 global LPs on operational due diligence

Related Coverage on AIN

• How LPs Actually Use the ILPA DDQ 2.0 to Vet a First-Time Fund Manager
• Operational DD Starts Before the PPM
• LP Due Diligence Starts Before the Call.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.