fund-of-funds-diligence

name

fund-of-funds-diligence

description

Use when evaluating a private fund (VC, PE, real assets, infrastructure, natural capital, impact) for an LP commitment, secondary purchase, or co-invest decision. Applies the five FoF analytical lenses — GP quality, track record, strategy fit, terms alignment, portfolio construction — produces a structured GP scoring rubric output, identifies LPA red flags, and flags vintage / concentration risks. Chains with impact-diligence for impact-aligned mandates. Designed for FoF allocators, family office investment teams, and LP staff at endowments / foundations / pensions / DFIs.

Fund-of-Funds Diligence — five-lens framework for GP commitments

When to use this skill

Trigger this skill when any of the following appears in the conversation:

• A GP is being evaluated for a primary commitment (Fund I, II, III, etc.)
• A secondary purchase of an LP interest is being considered
• A co-invest opportunity arrives from an existing or prospective GP
• Annual / quarterly portfolio review of underlying funds
• A re-up decision is on the table
• The user asks "should we commit to X?" "is this manager any good?" "what should I push back on in the LPA?" or "how does this fund fit our portfolio?"

For impact-aligned, regenerative, or natural-capital mandates, chain with impact-diligence after running the FoF lens — fund quality and impact quality are separable dimensions and both must clear the bar.

The five FoF analytical lenses

Every fund evaluation must clear all five lenses. Strength on one cannot compensate for weakness on another. The default failure mode is to fall in love with one lens (usually track record or thesis) and skim the rest.

Lens 1 — GP QUALITY

Question: Is this team capable of executing the stated strategy at this scale, repeatedly, for the next 10+ years?

Sub-dimensions:

• Team experience — years in role, prior firm pedigree, prior fund attribution (deal-level, not just firm-level)
• Team stability — partner turnover rate, key-person continuity, equity distribution across partners
• Team scaling — has the team added people commensurate with AUM growth? Or are 3 partners running a $1B fund?
• Cohesion — how long have the GPs worked together? Co-investment patterns suggest cohesion or fracture.
• Succession — for established firms, is the next generation in place? GP succession risk is underweighted by most LPs.
• Operational sophistication — back-office quality, IR cadence, reporting timeliness, audit trail.

Red flags:

• Track record claims that don't disaggregate by partner ("the firm returned 3x" without showing who made the calls)
• New partner additions in the last 12 months with no track record at the firm
• GPs taking outside operating roles or competing fund commitments
• Founder-only attribution — "Jim is the magic" is a key-person risk
• Re-branding from a prior firm to obscure earlier vintage performance

Lens 2 — TRACK RECORD

Question: Are the returns real, repeatable, and net-of-everything?

Sub-dimensions and metrics:

• DPI (Distributions to Paid-In) — actual cash returned. The only metric that matters in the end.
• TVPI (Total Value to Paid-In) — DPI + unrealized NAV. Watch for NAV inflation in later vintages.
• IRR — useful but manipulable via timing of calls and distributions
• MOIC (Multiple on Invested Capital) — gross vs net — always confirm
• PME (Public Market Equivalent) — Kaplan-Schoar or Direct Alpha; compare to liquid alternative
• Loss ratio — % of deals losing money. A high gross IRR + high loss ratio = a few outliers carrying the fund.
• Realization rate — % of capital returned vs vintage age
• Vintage benchmarking — top quartile is meaningless if 2014 vintage; compare to specific vintage peer set (Cambridge, Preqin, Burgiss, etc.)

What to actually look at:

1. Deal-by-deal cash flows — not just summary stats. Pattern matters: are there 2 home runs and 18 zeros, or even distribution?
2. J-curve shape vs vintage age — premature distributions can be early write-ups; persistent paper marks suggest stale valuations
3. Concentration of returns — what would the fund's TVPI be excluding the top 3 deals? If it collapses, the team is a sourcing operation, not a portfolio-construction operation.
4. Side-by-side fund comparison — Fund II should not look identical to Fund I; if it does, the GP has not learned. If it looks wildly different, there's strategy drift.
5. Net vs gross — always insist on net IRR/MOIC; gross numbers are presentation, not performance.
6. Subsequent-close adjustments — IRR is highly sensitive to call/distribution timing. Recalculate from raw cash flows if access is granted.

Red flags:

• Only TVPI shown, no DPI (or DPI < 0.5x after 7+ years)
• "Top quartile" claims without naming the benchmark dataset
• Refusal to share deal-by-deal cash flows under NDA
• IRR > 30% with DPI < 1.0x in a 6+ year fund — paper returns
• Loss ratio < 10% in a venture fund — likely write-up theater
• PME indistinguishable from S&P 500 / Russell 2000 — the illiquidity premium isn't there

Lens 3 — STRATEGY FIT & DIFFERENTIATION

Question: Is the strategy this fund pursues distinct, defensible, and persistent — and is it the right vehicle for the thesis?

Sub-dimensions:

• Thesis clarity — can you explain it in one sentence without their deck open?
• Differentiation — who are the 5 closest competitor funds, and what's the actual edge vs them? Network, geography, sector, structure, timing — be specific.
• Strategy drift — does Fund II/III/IV pursue the same strategy as Fund I, or is the strategy chasing AUM?
• Capital absorption — does the strategy actually need / absorb this fund size? Many strategies break above a certain AUM (e.g., seed VC at $500M).
• Pipeline / sourcing model — proprietary deal flow vs auction-driven; outbound vs inbound; what's the proof?
• Value-add narrative — is the GP genuinely adding value post-investment, or just selecting? Different fund profiles require different answers.
• Vehicle fit — is a closed-end fund the right structure? For some impact / natural capital strategies, an evergreen vehicle or hybrid debt-equity instrument is more appropriate.

Red flags:

• "Best-in-class team picking the best deals" with no further articulation of edge
• Sector / stage drift between funds explained as "we evolved"
• Fund size > 3x prior fund without explicit strategy adjustment
• "Operating partner" model with no evidence of operational engagement on prior deals
• Generic value-add claims ("we help with hiring, BD, fundraising") — every GP says this
• Closed-end 10+2 structure for a long-duration nature-based asset class (mismatch)

Lens 4 — TERMS & ALIGNMENT OF INTERESTS

Question: Are the economic and governance terms aligned with our interests as an LP, or tilted toward the GP?

Key economic terms:

• Management fee — bps on committed capital during investment period, on invested/NAV after. Watch for step-downs (or lack thereof).
• Carry — 20% standard; 25-30% in top VCs. European waterfall (whole-fund) vs American waterfall (deal-by-deal). European is more LP-friendly.
• Preferred return / hurdle — typically 8% for PE, none for VC. Catch-up provisions vary.
• Clawback — full clawback with interest is standard; net of taxes is GP-friendly.
• GP commitment — minimum 1-2% of fund size; 2-5% signals genuine alignment; 10%+ rare and strong.
• Fund expenses — what's borne by the fund vs the management company? Broken deal expenses, dead deal fees, organizational expenses.
• Transaction fees / monitoring fees — should be 100% offset against management fee (LPs won this fight long ago, but verify).

Key governance terms:

• Key-person clause — which partners trigger suspension of investment period if they depart?
• No-fault divorce / removal — supermajority of LPs (typically 75%) can remove GP without cause; with cause is easier.
• Investment period suspension — what triggers? How is it reactivated?
• Reinvestment / recycling provisions — can the GP recycle distributions back into new investments? Cap?
• Co-investment rights — for major LPs, free or fee-discounted co-invest is a meaningful term
• MFN (Most Favored Nation) — tiered by commitment size? Excluded carve-outs?
• Reporting standards — ILPA-compliant quarterly reports? Look-through reporting to portfolio companies?
• Side letter — what specific terms are negotiated bilaterally?

Red flags:

• Step-down from committed to invested capital doesn't kick in until end of investment period
• American (deal-by-deal) waterfall with weak clawback
• No hurdle rate in PE/infra strategies
• GP commitment < 1% of fund size (especially for emerging managers)
• "Subsequent close" provisions that allow new LPs in at unfair terms
• Key-person clause covers only one named partner (single point of failure)
• MFN with broad carve-outs (e.g., "any LP committing >$100M") that effectively excludes the LP from MFN benefits
• ILPA-non-compliant reporting

Lens 5 — PORTFOLIO CONSTRUCTION FIT

Question: Does this commitment fit the portfolio, given existing exposures, vintage layering, and forward pacing?

Sub-dimensions:

• Vintage diversification — adding to an under-allocated vintage or piling on?
• Geographic concentration — overlap with existing managers? Country risk concentration?
• Sector concentration — at the underlying company level, not just fund label
• Strategy diversification — primary / secondary / direct / co-invest balance
• Manager concentration — single-manager exposure cap? (Typical: 10-20% of total commitments.)
• Commitment pacing — is the proposed commitment consistent with the long-term pacing model? Over- or under-deploying?
• J-curve management — staggered vintages mitigate the J-curve drag
• Illiquidity tolerance — what % of NAV in private vs liquid? Where does this commitment push that ratio?

For impact-aligned FoF specifically:

• Impact theme overlap — is this manager adding a distinct impact lens, or duplicating existing exposures?
• Geography of impact — is the impact deployed where the strategy claims (Global South, smallholders, ecosystems at risk)?
• Stage-of-impact diversification — early-stage innovation vs scale capital vs infrastructure
• Reporting compatibility — can this manager report impact metrics in a way that aggregates into your FoF-level impact report?

Red flags:

• Same partners running multiple funds you're invested in (concentration through the back door)
• Sector exposure at portfolio-company level despite "different fund strategies"
• Vintage clustering — too much 2024-2026 vintage exposure
• Commitment that pushes single-manager concentration above the policy limit
• Impact reporting that can't roll up — orphaned data for LP impact reporting

Output structure — IC memo section

When asked for an FoF diligence assessment, format the output as:

## FoF Diligence — [Fund Name] [Fund #]

### Recommendation
[Commit / Pass / More Work Needed]
Recommended commitment: [$X million], subject to [list conditions]

### Five-Lens Scorecard
| Lens | Score (1-5) | Headline finding |
|---|---|---|
| GP Quality | X | ... |
| Track Record | X | ... |
| Strategy Fit | X | ... |
| Terms & Alignment | X | ... |
| Portfolio Construction Fit | X | ... |

### Track Record (key numbers)
- Prior fund DPI / TVPI / Net IRR / Vintage / Loss Ratio / PME
- Top-3-deal concentration: X% of TVPI
- Realization rate: X% of capital returned over Y years

### Top 5 LPA terms to negotiate
1. [Term] — current ask: X / our target: Y / why
2. ...

### Portfolio Fit
- Vintage layering impact: ...
- Concentration deltas: ...
- Impact overlap (if applicable, via impact-diligence): ...

### Top 3 things to push on next conversation
1. ...
2. ...
3. ...

### Bottom Line
[2-3 sentences capturing the IC-ready judgment]

When NOT to use this skill

• For direct deal evaluation (single portfolio company) — use deal-level diligence skills + financial-analysis
• For pure operational review of an existing GP relationship — use portfolio-monitoring skills
• For impact-only assessment with no FoF lens — use impact-diligence directly
• For legal redline of LPA — use lpa-redline; this skill flags red flags but doesn't markup the document

Chaining with other skills

• impact-diligence — run AFTER the five-lens scorecard for impact-aligned mandates. Treat impact as a sixth lens, not a substitute for any of the five.
• regen-glossary — use BEFORE memo writing if the strategy involves regen ag / natural capital / agroforestry to ensure precise vocabulary.
• tnfd-leap — for nature-exposure aggregation across a fund's underlying assets (biodiversity, ecosystem dependencies, sensitive-area overlays). Especially relevant for natural-capital, real-assets, and any portfolio with material land-use or supply-chain nature dependencies.
• carbon-credit-quality — when the fund's thesis includes carbon credit generation or its portfolio companies rely on carbon market revenue.
• financial-analysis:lbo, :dcf — for direct portfolio company underwriting within a co-invest decision.
• gp-track-record-parser — for deep cash-flow-level analysis of GP track record data.
• lpa-redline — for detailed LPA markup; this skill identifies what to redline, that skill does the markup.

Supporting assets

The assets/ folder contains:

• gp-scoring-rubric.md — 12-dimension GP scoring rubric with weighting guidance
• track-record-checklist.md — questions to ask + numbers to verify
• lpa-redflag-checklist.md — economic & governance terms with LP / GP friendliness flagged
• vintage-diversification.md — commitment pacing and J-curve management framework
• portfolio-construction-fit.md — concentration checks and overlap analysis

If these files aren't loaded, the SKILL.md body above is self-sufficient at lower precision.