Sharing due diligence in co-investments and club deals
Built on Chapter 12 of The Single Family Office by Richard C. Wilson. Full chapter text: FamilyOffices.com.
One of the best parts of co-investing is that someone else has done much of the work. One of the worst mistakes is assuming that work is enough. Here is how I think families should share and rely on diligence when they invest alongside others.
The upside of shared work
When a family co-invests next to a private equity fund, it gets the benefit of the fund's team. The fund found the company, checked it, negotiated the price, and will help manage it. A small family office could not easily repeat all of that.
In a club deal, the members can split the work. One partner with plant experience looks at operations. Another with finance depth checks the numbers. Done well, the club gets deeper diligence than any one member could do alone.
The risk of leaning too hard
The danger is that everyone assumes someone else checked. In a club, that can leave whole areas untested. In a co-investment, the family may see a polished memo and skip its own thinking.
Many co-investment agreements also make clear that the co-investor owns its decision. Barring fraud or similar failures, you cannot blame the fund if the deal goes wrong. That alone is a good reason to do your own checks.
Agree on who checks what
In a club deal, the guidelines I shared in the book say to agree on the main areas of diligence, who covers each one and by when. I would add one step. Write it down in a simple table that every member can see.
Each line should have an owner and a date. When a member finishes an area, they share a short written summary with the group. That way gaps are visible before closing, not after.
In a co-investment, ask for the file
When a fund offers a co-investment, push for access to the same diligence materials the fund relied on. Also push for enough time to read them. A right to co-invest is worth less if the deadline is too short to think.
Then add your own layer. Even a few calls can tell you a lot. Talk to a customer or two, a former employee, or a competitor.
Check the partner, not just the deal
A family office executive I interviewed for the book said his team keeps calling references on a deal partner until they are fully comfortable. They go well past the names the partner offers, reaching lenders, team members, and vendors.
That is diligence on the people across the table. In a club deal you will live with your partners for years. Their habits under stress matter as much as the company's numbers.
Screen before you dig
Full diligence takes weeks or months. Before that, use a short screen. We keep a short list of must-haves we check before we spend real time on a deal. One of them is full commitment from the CEO. As the old saying goes, the hen contributes to breakfast, but the pig is committed.
A shared screen also helps a club. If every member agrees on the screen, fewer weak deals reach the expensive stage.
Watch out for outside variables
The same executive warned against businesses that depend on government subsidies or pending approvals. Diligence cannot fully predict a regulator. Fewer outside variables means a cleaner deal to check and fewer excuses later.
Keep checking after closing
Diligence does not stop at closing. Agree on how members get ongoing financial updates, often through the leader. Regular reporting is how a club catches problems early enough to act.
What to take from this
- Build a shared diligence table with an owner and a date for each area.
- In co-investments, ask for the fund's diligence file and enough time to read it.
- Add a few independent calls of your own on every deal.
- Check your partners' references as hard as you check the company.
This page is general information, not legal or investment advice. Speak with qualified advisors before relying on shared diligence.
Questions and answers
Can a co-investor rely on the fund's diligence? It can use it, but should add its own checks. Many agreements put the decision on the co-investor.
How should a club split diligence work? Assign each area to the member best suited to it, with a deadline and a written summary.
What should families screen for first? A short list of must-haves, such as full CEO commitment, before deep diligence starts.
Does diligence end at closing? No. Ongoing reporting is how problems get caught early.