Fund Admin Questions LPs Ask in Operational Due Diligence

Short answer: In operational due diligence, LPs ask GPs who the fund admin is, whether it's independent, what it does versus the GP, how cash movements are approved, how valuations are set and recorded, how expenses are allocated, and whether the fund is audited. Prepare written answers, a service-provider list and your fund admin's controls documentation before LP meetings, not during them.

Investment diligence asks whether you can pick companies. Operational due diligence (ODD) asks whether the fund will be run safely. Fund administration is at the centre of ODD, and a weak answer can stall a commitment even when the LP likes your strategy.

For our fund administration service, see the service page.

Who runs ODD?

Institutional LPs such as endowments, foundations, pension plans and funds of funds often have dedicated ODD teams or hire consultants. Family offices and high-net-worth LPs may ask fewer, simpler questions. Many use some version of an industry questionnaire, such as the ILPA due diligence questionnaire, as a starting point.

The fund admin questions to expect

Independence and segregation of duties

LPs want to see that the person who decides to send money isn't the only person who can send it, and that someone independent records it. A third-party administrator holding the books, with GP approval and administrator execution, is the common answer. See third party fund administrators for why this matters.

Cash movement controls

Expect detailed questions about wires: who initiates, who approves, how changed instructions are verified, and whether bank accounts are in the fund's name. Business email compromise targets exactly these steps; the FBI's IC3 publishes warnings on wire fraud schemes. Have your process written down.

Valuation and expenses

LPs focus here because the SEC has repeatedly flagged problems with private fund fees, expenses and valuations (SEC risk alert). Have your valuation policy, your expense allocation policy and examples ready. The administrator can show how expenses are booked; the GP must explain the policy.

Documents to prepare

• Service provider list (administrator, auditor, tax preparer, counsel, bank)

• Administrator engagement summary and scope

• Administrator controls documentation or SOC report if available

• Valuation policy

• Expense allocation policy

• Sample quarterly LP statement

• Most recent audited financial statements, if any

Mistakes GPs make in ODD

• Saying "the admin handles it" without knowing what "it" includes

• No written valuation or expense policy

• One person able to approve and release wires

• Inconsistent answers between the GP and the administrator

Agree answers with your administrator before LPs call it for references.

Emerging managers: what's reasonable

LPs don't expect a Fund I manager to have a large-firm operations team. They do expect a credible structure: an independent administrator, an auditor if the fund is audited, written policies and dual controls on cash. That's achievable on a small budget. For more on picking a provider, see how to evaluate fund administrators and the fund administrator RFP scorecard.

How the ODD process usually runs

ODD tends to follow a pattern, though timing varies with the LP.

1. Questionnaire. The LP sends a due diligence questionnaire. Answer it in writing and keep a master copy so later answers stay consistent.

2. Document review. The LP reviews your fund documents, policies and service provider agreements.

3. Meetings. The ODD team meets the GP, sometimes on site, to walk through processes. Expect to be asked to show, not just tell: a sample wire approval, a sample statement, a valuation memo.

4. Service provider calls. The LP may call your fund admin, auditor and counsel to confirm what you said.

5. Findings. Some LPs share findings and ask for changes before committing; others simply decide.

Answering well

Be specific. "We have strong controls" is not an answer. "Every wire requires approval from the GP in the administrator's platform, the administrator releases it, and any change to wire instructions is verified by phone to a number on file" is.

Be consistent. The answers you give, the answers your administrator gives and what your documents say should match. Inconsistency is a common ODD red flag.

Be honest about gaps. If you don't have something yet, say so and give a date. LPs often accept a plan for a gap more readily than a vague answer.

Questions about the administrator itself

Beyond your fund, LPs may ask about the fund admin's own business:

• How long has it served funds like yours?

• Who is your day-to-day contact, and what happens if they leave?

• What systems does it use, and who can access your fund's data?

• Does it carry insurance relevant to its services?

• Has it had any significant errors or regulatory issues?

You can't answer all of these yourself. Ask your administrator for a short standard pack before your raise begins.

After the commitment

ODD doesn't end at commitment. Some LPs repeat reviews periodically, and most will ask again if you change administrator, auditor or key staff. Tell LPs about service provider changes promptly; finding out from a statement with a new logo is a bad surprise.

How Allocations helps in ODD

Every fund on Allocations has a dedicated fund accountant who can walk LPs through our processes, and we support the annual audit. The Fund plan is $19,500 per year; K-1 preparation is a separate add-on.

Frequently asked questions

What is operational due diligence?

An LP's review of how a fund is run: controls, service providers, valuation, reporting and compliance, separate from the investment strategy.

What fund admin questions do LPs ask?

Who the administrator is, its independence and scope, cash controls, books of record, valuation and expense processes, reporting timelines and audit details.

Will an LP contact my fund administrator?

Often, yes. Institutional LPs may call the administrator to confirm scope and processes.

Do emerging managers face the same ODD?

The questions are similar but expectations scale. An independent administrator, written policies and dual cash controls go a long way.

What documents help in ODD?

A service provider list, admin scope, controls documentation, valuation and expense policies, a sample LP statement and audited financials if available.

Can a fund admin answer ODD questionnaires for me?

It can answer questions about its own processes. The GP must answer for policies and decisions it owns.