The Private Investment Due Diligence Checklist: How to Evaluate Deals Like a Professional
The Complete Framework for Evaluating Private Equity, Real Estate Syndications, and Alternative Investments — Without Getting Burned
The $200,000 Lesson I'll Never Forget
Early in my investing career, I made a mistake that still haunts me.
A colleague introduced me to a "can't-miss" real estate deal. The sponsor seemed credible — nice suit, professional website, confident handshake. The projections looked incredible. The property photos were gorgeous. Other investors were already in.
I invested $200,000.
You can probably guess what happened. The deal went sideways. The "experienced" sponsor turned out to have one prior deal — which also failed. The projections were fantasy. The "other investors" were mostly friends and family with no idea what they were doing.
I got back $47,000. The rest evaporated.
That $153,000 lesson taught me something no book could: due diligence isn't optional. It's not a formality you rush through to get to the exciting part. It IS the exciting part — or at least it should be, because it's where you save yourself from disasters.
Since then, I've developed a systematic approach to evaluating every private investment. It's saved me from countless bad deals and helped me identify genuinely good ones.
This guide shares that framework. It's the checklist I wish someone had given me before I wrote that first check.
"Due diligence isn't about finding reasons to invest. It's about finding reasons NOT to invest. The deals that survive that gauntlet are the ones worth your money. Everything else is just marketing that got past your defenses."
— Kenton Gray, Founder & CEO, Veracor Group
The Due Diligence Mindset
Before we get to the checklist, let's establish the right mental framework.
You're Looking for Red Flags, Not Green Lights
Every sponsor will tell you why their deal is great. Your job is to find what could go wrong.
This isn't pessimism — it's realism. Every investment has risks. The question is whether they're disclosed, understood, and appropriately compensated.
If you can't find any concerns after thorough diligence, you haven't looked hard enough.
Assume You're Missing Something
Private investments are complex. Even experienced investors miss things.
Never assume you've seen everything. Always wonder what you might be overlooking.
Trust, But Verify
People lie. Even nice people. Even people who seem trustworthy.
Don't take anything at face value. Verify track records. Call references. Check public records. The honest sponsors won't mind — they expect it.
Walk Away Freely
This is the most important mindset shift.
You have no obligation to invest. The sponsor needs you more than you need them. Good deals will come again.
If something doesn't feel right, walk away. FOMO (fear of missing out) has destroyed more portfolios than any economic downturn.
Time Is Your Friend
Legitimate sponsors allow time for due diligence. Anyone pressuring you to decide quickly is either hiding something or running a bad process.
"This deal is closing in 48 hours, you need to commit now" = walk away.
The Master Due Diligence Checklist
This checklist covers the key areas for evaluating most private investments. Adapt it based on specific deal types.
Section 1: The Sponsor / Manager
The most important due diligence you'll do.
Track Record
| Item | Status | Notes |
|---|---|---|
| Verified track record of realized investments | ☐ | Not projected — actually completed deals |
| Performance vs. original projections | ☐ | Did they hit their targets? |
| Number of full-cycle deals | ☐ | Acquisition through exit, not just acquisitions |
| Years of relevant experience | ☐ | Industry-specific, not just general business |
| Performance in different market conditions | ☐ | Have they navigated downturns? |
| References from prior investors | ☐ | Called them, asked specific questions |
Questions to ask:
- Walk me through your three best deals and your worst deal
- How did actual returns compare to projections across your portfolio?
- What went wrong in your least successful investment?
- How many deals have lost money for investors?
Red flags:
- No full-cycle experience (only acquisitions, no exits)
- Only showing winners
- Projections presented as track record
- Vague answers about past performance
- Inability to discuss failures honestly
Background Checks
| Item | Status | Notes |
|---|---|---|
| Google search (name + "lawsuit," "SEC," "fraud") | ☐ | Search principals and company |
| FINRA BrokerCheck | ☐ | If registered (most aren't) |
| SEC EDGAR search | ☐ | Prior filings, enforcement actions |
| State regulatory databases | ☐ | Varies by state |
| LinkedIn profile review | ☐ | Does claimed experience check out? |
| News search | ☐ | Any concerning coverage |
| Court records search | ☐ | Civil and bankruptcy filings |
Red flags:
- Unexplained gaps in employment history
- Prior bankruptcies (personal or business)
- SEC enforcement actions
- Pattern of lawsuits from investors
- Discrepancies between claimed and verifiable experience
Alignment
| Item | Status | Notes |
|---|---|---|
| Co-investment amount | ☐ | Real money, not just GP interest |
| Co-investment as % of sponsor's net worth | ☐ | Meaningful relative to their situation |
| Fee structure reviewed | ☐ | Are fees reasonable and market-standard? |
| Clawback provisions | ☐ | Protection if early distributions reverse |
| Conflicts of interest disclosed | ☐ | How are they managed? |
Questions to ask:
- How much of your own money is in this deal?
- What percentage of your net worth does that represent?
- Walk me through all the fees you'll receive
- What conflicts of interest exist?
Red flags:
- No co-investment
- Token co-investment (tiny percentage of deal or net worth)
- Excessive or hidden fees
- Undisclosed conflicts
- Fees that don't depend on performance
References
| Item | Status | Notes |
|---|---|---|
| At least 3 investor references | ☐ | From prior deals |
| References actually called | ☐ | Not just names collected |
| Questions asked about communication | ☐ | Especially during problems |
| Questions asked about surprises | ☐ | Anything unexpected? |
| Would they invest again? | ☐ | The ultimate question |
Questions to ask references:
- Did returns match projections?
- How was communication, especially when things went wrong?
- Were there any surprises during the investment?
- Would you invest with this sponsor again?
- What could they do better?
Red flags:
- Sponsor won't provide references
- References are only friends/family
- References can't speak to actual investment experience
- Consistent complaints about communication
- References wouldn't invest again
Section 2: The Investment / Deal
Business Thesis
| Item | Status | Notes |
|---|---|---|
| Can explain the thesis in 2 sentences | ☐ | If you can't explain it, don't invest |
| Thesis makes sense independent of sponsor's pitch | ☐ | Would this work for someone else too? |
| Value creation is clear and achievable | ☐ | How exactly does this make money? |
| Competitive advantage identified | ☐ | Why will this succeed vs. alternatives? |
| Market conditions support thesis | ☐ | Is this the right time? |
Questions to ask:
- In one sentence, why will this investment work?
- What's the source of returns?
- Why is this opportunity available (why hasn't someone else already done it)?
- What could cause this thesis to fail?
Red flags:
- Thesis is overly complex or unclear
- Returns depend entirely on market appreciation
- No clear value-add or competitive advantage
- "Trust me" instead of explainable logic
Market / Location Analysis (for real estate)
| Item | Status | Notes |
|---|---|---|
| Market fundamentals researched | ☐ | Employment, population, income growth |
| Supply/demand dynamics understood | ☐ | What's being built? What's the vacancy? |
| Local economic drivers identified | ☐ | What industries support this market? |
| Comparable properties reviewed | ☐ | Are projections realistic vs. comps? |
| Independent market research | ☐ | Not just sponsor's materials |
Red flags:
- Over-reliance on single employer or industry
- Significant new supply being built
- Declining population or employment
- Projections significantly exceed comparable properties
Financial Projections
| Item | Status | Notes |
|---|---|---|
| Assumptions reviewed and reasonable | ☐ | Revenue, expenses, cap rates, etc. |
| Compared to historical performance | ☐ | Are projections consistent with history? |
| Sensitivity analysis reviewed | ☐ | What if assumptions are wrong? |
| Downside scenarios modeled | ☐ | What does bad look like? |
| Exit assumptions are conservative | ☐ | Exit cap rate, timing, buyer pool |
Questions to ask:
- What are your key assumptions?
- What happens if [key assumption] is 20% worse than projected?
- What's your break-even scenario?
- How does this compare to actual performance of your prior deals?
Red flags:
- Projections far exceed comparable deals
- No sensitivity analysis
- Unrealistic exit assumptions
- Revenue growth without explanation
- Expense assumptions that seem too low
Risk Assessment
| Item | Status | Notes |
|---|---|---|
| Key risks identified and understood | ☐ | Beyond generic PPM risk factors |
| Market risk | ☐ | What if market conditions change? |
| Execution risk | ☐ | What if things don't go as planned? |
| Financing risk | ☐ | Debt terms, refinancing exposure |
| Regulatory risk | ☐ | Government/regulatory changes |
| Key person risk | ☐ | What if critical people leave? |
| Liquidity risk | ☐ | Can you get out if needed? |
Questions to ask:
- What are the three biggest risks to this investment?
- What market conditions would cause this to fail?
- What's your plan if [specific scenario] happens?
- How have you mitigated these risks?
Red flags:
- Sponsor can't articulate specific risks
- Risks are dismissed rather than addressed
- No contingency plans
- "Can't lose" attitude
Section 3: The Documents
Private Placement Memorandum (PPM)
| Item | Status | Notes |
|---|---|---|
| PPM received and reviewed | ☐ | Not just the pitch deck |
| Business description is clear | ☐ | Matches verbal representations |
| Risk factors reviewed | ☐ | Specific vs. generic risks |
| Use of proceeds detailed | ☐ | Where does the money go? |
| Fee structure fully disclosed | ☐ | All fees, not just headline |
| Conflicts of interest disclosed | ☐ | How are they managed? |
| Track record presented (if any) | ☐ | Consistent with other diligence |
| No material discrepancies | ☐ | PPM matches pitch materials |
What to look for in Use of Proceeds:
| Category | Reasonable Range | Concern Threshold |
|---|---|---|
| Hard costs (acquisition, construction) | 75-85% | Below 70% |
| Reserves | 3-8% | Below 2% |
| Offering/legal costs | 2-4% | Above 5% |
| Sponsor fees | 2-5% | Above 8% |
Operating Agreement / LP Agreement
| Item | Status | Notes |
|---|---|---|
| Waterfall structure understood | ☐ | How profits are distributed |
| Preferred return terms | ☐ | Rate, cumulative vs. non-cumulative |
| Fees documented | ☐ | Matches PPM |
| Voting rights | ☐ | What can LPs vote on? |
| Exit provisions | ☐ | How/when can you exit? |
| Key person provisions | ☐ | What happens if key person leaves? |
| Amendment provisions | ☐ | How can terms be changed? |
| Reporting requirements | ☐ | What will you receive, when? |
Red flags:
- No preferred return
- Waterfall that favors GP excessively
- LP rights can be amended without consent
- Minimal reporting requirements
- No key person provisions
Subscription Agreement
| Item | Status | Notes |
|---|---|---|
| Investment amount confirmed | ☐ | Matches your intended commitment |
| Accreditation representations | ☐ | You qualify and can certify |
| Wire instructions verified | ☐ | Confirm directly with sponsor |
| Understand what you're signing | ☐ | All representations and warranties |
Critical: Verify wire instructions through a separate channel (phone call, not email). Wire fraud is real.
Section 4: Professional Review
Legal Review
| Item | Status | Notes |
|---|---|---|
| Attorney reviewed documents (for significant investments) | ☐ | Securities/fund formation specialist |
| Key provisions explained | ☐ | Understand what you're agreeing to |
| Unusual terms flagged | ☐ | Anything non-standard |
| Questions addressed | ☐ | All concerns resolved |
When to use an attorney:
- Investments over $100,000
- First-time investment with a sponsor
- Complex structures
- Anything that feels unusual
Tax Review
| Item | Status | Notes |
|---|---|---|
| CPA familiar with structure | ☐ | K-1s, depreciation, entity types |
| Tax implications understood | ☐ | When will taxes be due? |
| K-1 timing discussed | ☐ | When to expect; extension impact |
| State tax implications | ☐ | May have filing requirements in multiple states |
Section 5: Fit Assessment
Portfolio Fit
| Item | Status | Notes |
|---|---|---|
| Fits within target alternative allocation | ☐ | Not over-concentrating |
| Diversification maintained | ☐ | Across sponsors, strategies, markets |
| Vintage diversification | ☐ | Not all invested in same year |
| Risk profile appropriate | ☐ | Matches overall risk tolerance |
Personal Fit
| Item | Status | Notes |
|---|---|---|
| Time horizon matches yours | ☐ | Can you wait the full term? |
| Liquidity needs addressed | ☐ | You don't need this money |
| Truly understand the investment | ☐ | Could explain to spouse/advisor |
| Comfortable with sponsor relationship | ☐ | Multi-year partnership |
| Realistic expectations | ☐ | Not investing for status |
The Final Questions
Before committing, answer honestly:
| Question | Answer |
|---|---|
| Would I make this investment if there were no tax benefits? | |
| Can I afford to lose 100% of this investment? | |
| Am I investing because it's smart, or because I want to feel sophisticated? | |
| Have I found any red flags I'm ignoring? | |
| Is there any pressure to decide quickly? | |
| Would I be embarrassed to explain this to a skeptical friend? |
If any answer gives you pause, stop. Investigate further or walk away.
Due Diligence Timeline
A responsible process takes time. Here's a realistic timeline:
| Phase | Activities | Duration |
|---|---|---|
| Initial Review | Review pitch materials, basic interest assessment | 1-3 days |
| Document Review | PPM, agreements, detailed analysis | 1-2 weeks |
| Sponsor Diligence | Track record, backgrounds, references | 1-2 weeks |
| Professional Review | Attorney, CPA as needed | 1-2 weeks |
| Final Decision | Synthesis, final questions, decision | 3-5 days |
| Total | 4-8 weeks |
Legitimate sponsors allow adequate time. Anyone rushing you is waving a red flag.
Red Flags Summary
Walk away if you see these:
Sponsor Red Flags
- No verifiable track record
- Won't provide references
- Unexplained regulatory history
- No meaningful co-investment
- Pressure to commit quickly
- Evasive answers to direct questions
- Can't explain failures
Deal Red Flags
- Projections far exceed comparables
- No clear value-add thesis
- Excessive or hidden fees
- Complexity without explanation
- "Guaranteed" or "can't lose" language
- No downside scenario analysis
Document Red Flags
- PPM doesn't match verbal pitch
- Excessive soft costs
- No preferred return
- One-sided governance
- Minimal reporting commitments
Process Red Flags
- Artificial urgency
- Discouraging questions
- Difficulty getting documents
- References unavailable or friends/family only
- Wire instructions only via email
When to Use This Checklist
Not every investment needs the full checklist. Scale your diligence to the situation:
| Investment Size | Sponsor Relationship | Recommended Diligence |
|---|---|---|
| < $25,000 | New sponsor | Full checklist (learning investment) |
| < $25,000 | Established relationship | Abbreviated (focus on deal-specific) |
| $25,000 - $100,000 | New sponsor | Full checklist + professional review |
| $25,000 - $100,000 | Established relationship | Full checklist, selective professional |
| > $100,000 | Any | Full checklist + full professional review |
Building Your Due Diligence System
Keep Records
Create a file for each potential investment:
- All documents received
- Notes from calls and meetings
- Reference call notes
- Background check results
- Questions asked and answered
- Final decision rationale
Even for deals you pass on — you may see the sponsor again.
Build Relationships
Over time, you'll develop relationships with sponsors you trust. This doesn't eliminate diligence, but it informs it.
Trusted sponsors are easier to diligence (track record is known) but still require deal-specific analysis.
Learn From Every Deal
After each investment:
- Did projections match reality?
- How was sponsor communication?
- What did you miss in diligence?
- What would you do differently?
Every investment teaches something. Capture those lessons.
The Veracor Standard
When you invest with us, we expect you to do this diligence. We welcome it.
What we provide:
- Complete PPMs and agreements
- Verified track record with supporting data
- References from prior investors (happy to connect you)
- Time to complete your process
- Direct access to our team for questions
- Transparent fee disclosure
What we expect:
- You've read the documents
- You understand the investment
- Your questions are answered
- Your timeline allows for proper review
- The investment fits your situation
We'd rather lose an investor to thorough diligence than gain one who didn't understand what they were buying.
The Bottom Line
Due diligence isn't bureaucracy. It's not a box to check before the fun starts. It IS the investment process.
The deals that survive rigorous scrutiny are the ones worth your capital. Everything else is just marketing that got past your defenses.
Take the time. Do the work. Ask the uncomfortable questions. Walk away freely when things don't add up.
The $153,000 I lost taught me this lesson the hard way. Use this checklist so you don't have to learn it the same way.
"I've never regretted doing too much due diligence. I've often regretted doing too little. The few hours spent investigating a deal are nothing compared to the years you'll spend hoping a bad investment somehow turns around. Do the work upfront."
— Kenton Gray, Founder & CEO, Veracor Group
Important Disclosures
This checklist is for informational and educational purposes only. It does not constitute investment, tax, or legal advice.
Due diligence cannot eliminate investment risk. Even well-researched investments can lose money. Past performance does not guarantee future results.
Consult qualified professionals for specific investment decisions.
© 2026 Veracor Group. All rights reserved.
Last updated: January 2026