Due Diligence

Due diligence is the structured investigation a family office does before it commits capital, appoints a manager, or enters a material relationship. It is not one checklist. Investment due diligence asks whether the opportunity fits the investment policy and whether the return, risk, and liquidity claims stand up. Legal and tax due diligence ask what the documents actually say, and in which jurisdiction. Operational due diligence asks whether the manager can run the process: valuation, cash controls, cybersecurity, service providers, and key-person risk. Reputational due diligence asks who else is in the room.

The work should produce a file, not a feeling. Minutes, questionnaires, reference calls, and exceptions belong with the decision. A family that cannot reconstruct why it invested will struggle to monitor the position later, and will struggle even more when a different person inherits the portfolio.

Due diligence does not guarantee a good outcome. It reduces the chance of a preventable one: a fee the office did not see, a lock-up it cannot live with, a related-party deal it never spotted, or a manager whose operations cannot support the strategy.

Why it matters for family offices

Family offices write large cheques relative to their staff. A single private equity commitment or co-investment can dwarf the time available to review it. Without a repeatable process, decisions follow the last meeting or a trusted introduction. An investment committee only works if it receives a paper that covers the uncomfortable questions, including conflicts and how the position looks through the rest of the book.

The same discipline applies to service providers. Banks, administrators, software vendors, and advisers all become part of the family's operating risk. KYC and AML runs in both directions: the institution checks the family, and the family should check the institution.

How it shows up in practice

Suppose the investment team proposes a $5 million commitment to a mid-market buyout fund. The due diligence pack includes the strategy, team stability, track record against a relevant peer group, fees and carried interest, key-person clauses, valuation policy, auditor, custodian, and a look-through of existing exposure to the same sector. One committee member discloses a personal relationship with the manager and recuses.

Legal review finds a side letter is available on reporting frequency and MFN. The committee approves $3 million, not $5 million, because the full amount would push private equity above its range once unfunded commitments are counted. The file records the exception, the cap, and the date the first capital call is expected. That record is what due diligence is for: a decision that a future principal can still understand.