Partnership due diligence is as much about evaluating the people as it is about the investment opportunity or operational quality, and it can be highly subjective in certain areas. Background checks can uncover seemingly trivial but important details about managers and firm personnel, and experience helps identify undesired tendencies and biases. When combined with previous concerns from an investment or operational perspective, a background check flag can provide the final impetus to reject a partnership investment – especially if it corroborates a gut feeling about a manager or other information that suggests something is amiss.
Accordingly, an initial background check should be a standard practice. However, it doesn’t, or shouldn’t, stop there; due diligence should be an ongoing process that can uncover potential flags as they occur. While the results are often trivial in nature and can provide fodder for interesting conversations (one manager was amused at our questioning about a recent speeding ticket), they can occasionally flag serious problems in real time: Tax liens, arrests, civil and criminal lawsuits, etc.
One final bit of advice to fund managers; please be up front and open with potential investors. Learning about something from you is always better than us finding it out from a third-party resource later.