Alternative investments have become an increasingly important component of modern portfolio construction. As access to private markets continues to expand, advisors have more opportunities than ever to incorporate private real estate, private credit, infrastructure, and other alternative investments into client portfolios.
Greater access, however, introduces a new challenge.
When multiple sponsors offer similar investment strategies, investment selection increasingly becomes an exercise in manager selection. Historical performance, market opportunity, and investment strategy all matter, but they represent only part of the due diligence process. Understanding the people, governance, financial stability, and operational discipline behind an investment has become equally important.
Institutional investors have long recognized that investment manager due diligence extends well beyond evaluating historical returns. Rather than evaluating an offering solely on projected returns, they assess how an investment sponsor operates, manages risk, communicates through market cycles, and aligns with investor interests.
During a recent episode of Advising the Modern Allocator on Wealth Unfiltered, Jake Heidkamp, CEO of FactRight, discussed how institutional due diligence frameworks can help advisors evaluate private market sponsors with greater confidence.
Why Institutional Due Diligence Is Becoming More Important
As private markets continue evolving, advisors are evaluating a broader universe of sponsors than ever before. New fund structures, interval funds, evergreen vehicles, and private market solutions have significantly expanded investor access to alternative investments.
With greater opportunity comes greater responsibility.
Many investment managers pursue similar strategies, particularly within popular sectors such as multifamily real estate, private credit, and infrastructure. Distinguishing between those sponsors requires looking beyond marketing materials and performance projections.
Heidkamp described FactRight’s philosophy with a simple principle:
“Trust, but verify.”
Institutional due diligence is built on verification. Rather than accepting claims at face value, the process seeks supporting evidence through financial analysis, legal and regulatory reviews, governance documentation, operational policies, and historical performance data.
For advisors, this represents a shift from evaluating investments based primarily on opportunity to evaluating the organizations responsible for executing that opportunity.
Evaluating the Sponsor Behind the Investment
A compelling investment strategy does not necessarily indicate a well-managed investment firm.
Throughout the discussion, Heidkamp emphasized that institutional due diligence extends well beyond reviewing individual deals. His team evaluates organizational structure, financial health, governance policies, investment committee processes, legal history, operational controls, and the long-term sustainability of the sponsor’s business.
These characteristics rarely appear in a sponsor’s marketing presentation, yet they often provide meaningful insight into how an organization will perform over multiple market cycles.
Strong sponsors demonstrate more than investment expertise. They exhibit disciplined decision-making, transparent reporting, clearly defined governance processes, and operational consistency. As institutional investment practices continue influencing the RIA channel, these organizational characteristics are becoming increasingly important considerations during manager selection.
The Best Due Diligence Often Begins With the Hardest Questions
One of the most compelling insights from the conversation centered on how advisors should evaluate a sponsor’s track record.
Investment presentations naturally emphasize successful exits, attractive returns, and completed transactions. While those metrics are important, Heidkamp suggested they rarely tell the complete story.
“You can learn a lot more about managers through some of the more challenging times… Did they communicate effectively through areas where they were having challenging times? That, to me, really always sticks out.”
Periods of underperformance often reveal characteristics that cannot be measured through performance statistics alone.
- How did the sponsor communicate with investors?
- Were the underwriting assumptions adjusted appropriately?
- How were conflicts addressed?
- Did management remain disciplined when market conditions changed?
For institutional investors, these questions often provide greater insight into manager quality than a single successful investment. Character, governance, and transparency tend to become most visible when outcomes differ from expectations.
Alignment, Governance, and Investor Protection
Institutional frameworks place significant emphasis on alignment of interest, governance, and transparency.
Throughout the conversation, Heidkamp discussed the importance of reviewing governance provisions, conflicts of interest, investor rights, fee structures, preferred returns, and the overall alignment between sponsors and limited partners. These structural elements shape decision-making throughout the life of an investment.
A well-structured fund ensures that sponsors and investors are working toward the same long-term objectives. Conversely, poorly aligned incentives can introduce conflicts that influence capital allocation, valuation practices, or fee generation.
As alternative investments become more widely adopted, advisors are increasingly recognizing that due diligence extends beyond evaluating investment opportunities. It also requires understanding how investment structures support investor protection and long-term alignment.
The Evolution of Sponsor Due Diligence
Private markets continue to expand, but so do the expectations surrounding manager selection. Institutional due diligence is no longer limited to large pension funds, endowments, and family offices. Increasingly, RIAs and independent advisors are incorporating similar frameworks into their investment processes as access to private markets becomes more widespread.
The objective is not to identify perfect managers. Rather, it is to develop a more complete understanding of the people, processes, governance, and operational discipline that ultimately influence long-term investment outcomes.
Heidkamp summarized that philosophy through one of the discussion’s most meaningful observations:
“You can learn a lot more about managers through some of the more challenging times.”
As portfolio construction continues to evolve, institutional due diligence is becoming an increasingly valuable component of manager selection. For modern allocators, evaluating an investment opportunity means understanding far more than the assets themselves—it means understanding the organization responsible for stewarding investor capital through every stage of the market cycle.
Interested in learning how leading advisors evaluate alternative investments, sponsor quality, and institutional portfolio construction? Explore more Wealth Unfiltered insights and conversations with institutional investment leaders.
