Alternative Investment Funds can give investors access to private equity, private credit, venture capital, infrastructure and sophisticated trading strategies. They can also lock up capital for years, charge complex fees and rely heavily on manager judgement.
That makes due diligence more important than simply looking at a return chart.
SEBI’s investor-education material defines due diligence as a comprehensive assessment of material facts before investing. For AIFs, that means evaluating not only the portfolio but also the people, legal structure, valuation process, liquidity, conflicts and operational controls behind the fund.
This 15-point framework is designed for HNIs and sophisticated investors reviewing an Indian AIF. For context, first read our alternative investments guide and Category I, II and III AIF explainer.
Important: This checklist is educational. It does not replace review of the placement memorandum, contribution agreement, side letters, tax documents or advice from a SEBI-registered investment adviser, lawyer or tax professional.
Why AIF Due Diligence Is Different
Mutual funds operate with standardised disclosures and frequently priced portfolios. Many AIFs invest in unlisted assets that may be valued periodically rather than continuously. Investors may commit capital today, have it called over several years and receive distributions only when portfolio assets are sold.
That creates risks that are easy to miss:
- Manager selection risk
- Illiquidity
- Valuation uncertainty
- Capital-call obligations
- High fee layers
- Leverage or borrower leverage
- Related-party transactions
- Key-person dependence
- Weak exits
- Operational or cyber failures
1. Define the Exact Strategy
Start by asking what the fund actually does.
“Alternative investment” is too broad. “Category II AIF” is still too broad.
You need to know whether the strategy is:
- Growth private equity
- Buyout
- Venture capital
- Private credit
- Distressed credit
- Infrastructure
- Long-short equity
- Quantitative trading
- Fund of funds
Then identify the return engine. Does the manager expect returns from earnings growth, multiple expansion, contractual interest, leverage, arbitrage, operational improvement or distressed recovery?
If the manager cannot explain the return source in plain language, stop there.
2. Assess the Manager’s Relevant Track Record
A manager’s brand name is less important than the team’s experience in the specific strategy.
Ask for:
- Prior funds managed
- Realised versus unrealised returns
- Performance by vintage year
- Loss-making investments
- Performance through market stress
- Team members responsible for the track record
- Whether the same people remain with the new fund
A 20% reported IRR is less useful if most value is still unrealised or if the people who created the track record have left.
3. Examine Realised Cash, Not Only Headline IRR
Private funds commonly report IRR. IRR can be useful, but it is highly sensitive to cash-flow timing and estimated residual values.
Also review:
- MOIC: Total value relative to capital invested
- DPI: Cash actually returned to investors
- RVPI: Remaining estimated value
- TVPI: Distributed plus remaining value
A fund can show an attractive IRR while having returned little cash. Our IRR vs MOIC vs DPI vs TVPI guide explains these metrics with worked examples.
4. Compare Against the Right Benchmark
Ask whether the investment added value relative to a simpler liquid alternative.
A growth private-equity fund should not automatically compare itself with a low-risk debt benchmark. A private-credit fund should not claim alpha simply because its yield exceeds government securities while taking much greater credit and liquidity risk.
For private-market strategies, a Public Market Equivalent calculation can help compare the timing of capital calls and distributions with a relevant public index.
5. Understand the Full Fee Stack
Never rely on one headline management-fee number.
Review:
- Management fee
- Carried interest/performance fee
- Hurdle or preferred return
- Catch-up mechanism
- Clawback
- Fund administration
- Audit and valuation costs
- Custody expenses
- Legal expenses
- Transaction or monitoring fees
- Underlying fund fees in a fund-of-funds structure
Ask for an example showing what an investor retains under weak, average and strong performance scenarios.
Our AIF fees guide breaks down each layer.
6. Test the Liquidity Structure
Liquidity risk is one of the biggest differences between AIFs and ordinary market products.
Ask:
- What is the fund tenure?
- How long is the investment period?
- Can tenure be extended?
- Can the fund suspend distributions?
- Can investors transfer units?
- Is there a realistic secondary market?
- Could distributions be made in securities rather than cash?
Do not commit money needed for emergencies, property purchases, education or other near-term goals.
7. Map Capital Calls and Cash-Flow Risk
Many AIFs do not take the entire commitment on day one. Instead, the manager draws capital as investments are identified.
This creates an obligation.
Suppose you commit ₹1 crore but initially fund only ₹30 lakh. You still need the capacity to provide the remaining ₹70 lakh when called.
Stress test what happens if:
- Several funds call capital simultaneously
- Public markets fall at the same time
- Expected distributions are delayed
- Your business cash flow weakens
Overcommitting because you assume distributions will fund future capital calls is a serious portfolio risk.
8. Review Portfolio Concentration
Ask how concentrated the fund can become.
Look at:
- Maximum exposure to one company
- Top-five holdings
- Sector concentration
- Promoter-group exposure
- Geographic concentration
- Vintage concentration
A fund with ten positions behaves differently from one with fifty. In private credit, one large default can materially affect returns. In venture capital, a few successful companies may drive the entire fund.
9. Understand Leverage
For Category III AIFs, ask for gross and net leverage and identify which derivatives create exposure.
For Category I and II, where ordinary fund-level leverage is restricted, still investigate:
- Temporary borrowing
- Subscription facilities
- Portfolio-company debt
- Borrower leverage in private-credit funds
- Leverage embedded in derivatives or structured securities
A “non-leveraged fund” may still own highly leveraged companies.
10. Inspect the Valuation Process
Private assets do not have a market price every second. That makes the valuation process critical.
Ask:
- Who is the independent valuer?
- How frequently are assets valued?
- Which methodology is used?
- Who approves valuation changes?
- How are conflicts handled?
- How quickly are impairments recognised?
SEBI has continued to refine valuation requirements for AIFs, including frameworks around independent valuers and reporting. Investors should read the current placement memorandum and valuation policy.
11. Analyse Deal Sourcing
A private-market manager needs access to opportunities worth owning.
Ask what percentage of deals comes from:
- Proprietary relationships
- Investment banks
- Promoters
- Private-equity sponsors
- Other funds
- Competitive auctions
If every deal is widely auctioned, ask why the manager expects to earn superior returns after paying the same or higher price as competitors.
12. Review Governance and Conflicts
Conflicts can arise when the same manager operates multiple funds, invests across different parts of a company’s capital structure or transacts with related entities.
Review:
- Allocation policy between funds
- Related-party transactions
- Co-investment rules
- Side letters
- Preferential investor rights
- Valuation conflicts
- Manager-affiliated service providers
SEBI has issued specific frameworks around pro-rata and pari-passu investor rights, co-investment and due diligence. Ask how the manager implements those requirements operationally.
13. Examine Operational Infrastructure
Investment skill is not enough if operational controls are weak.
Verify:
- Independent administrator
- Auditor
- Custodian where applicable
- Compliance team
- Cybersecurity controls
- Business-continuity planning
- Investor reporting systems
- Bank-account controls
Ask whether any material audit qualifications, cyber incidents, regulatory actions or litigation have occurred.
14. Study Key-Person and Team Risk
Some funds depend heavily on one founder or investment head.
Ask:
- Who makes final investment decisions?
- What happens if that person leaves?
- Is there a key-person clause?
- Can new investments be suspended?
- How is carry shared across the team?
- Is succession planning credible?
A strong historical record may not be repeatable if the team changes materially.
15. Check Alignment of Interest
Managers often emphasise that they invest alongside clients. This can be positive, but the details matter.
Ask:
- How much capital has the manager or sponsor committed?
- Is it funded with real cash?
- Is it invested on the same economic terms?
- Can the manager withdraw early?
- Are there related financing arrangements?
Alignment also depends on fee design. A large performance fee with weak clawback provisions may encourage risk-taking.
Placement Memorandum: What to Read Closely
Do not treat the Private Placement Memorandum as legal boilerplate.
Focus on:
- Investment objective
- Permitted investments
- Concentration limits
- Leverage policy
- Valuation methodology
- Distribution waterfall
- Fees and expenses
- Conflicts
- Key-person provisions
- Default by investors on capital calls
- Transfer restrictions
- Tenure and extension
- Liquidation and winding-up procedures
SEBI introduced Fast-Track and GARUDA mechanisms in 2026 for processing certain AIF placement memoranda. Faster regulatory processing does not mean SEBI is endorsing the economic merits of the investment.
AIF Due-Diligence Scorecard
| Area | Strong Signal | Warning Sign |
|---|---|---|
| Track record | Realised, attributable and net-of-fee | Mainly unrealised or predecessor claims |
| Fees | Clear waterfall and examples | Multiple vague expense layers |
| Valuation | Independent and transparent | Manager-controlled with weak disclosure |
| Liquidity | Matches underlying assets | Promises easy exits from illiquid assets |
| Governance | Clear conflict policies | Heavy related-party activity |
| Team | Stable with relevant experience | High turnover or one-person dependence |
Red Flags That Should Slow You Down
- “Guaranteed” or “assured” return language
- Pressure to invest before you can review documents
- Comparisons with fixed deposits for a risky private-market product
- Performance shown only gross of fees
- No disclosure of failed investments
- Unclear valuation process
- Heavy use of related parties
- High concentration without a clear risk case
- Large fee layers hidden in footnotes
- Manager unable to explain liquidity or exit risk
Questions to Ask at the Final Meeting
- What has to go right for this fund to hit its target return?
- What is the most realistic way we could lose money?
- Which prior investment produced your largest loss?
- How much of your historical return has been distributed in cash?
- What would happen if exits were delayed by two years?
- Which fees are not included in the headline management fee?
- What would trigger a valuation write-down?
- Which person leaving would most damage the strategy?
- What percentage of my commitment could be called during a market crisis?
- Why should I own this instead of a simpler liquid investment?
Frequently Asked Questions
What documents should I review before investing in an AIF?
At minimum, review the placement memorandum, contribution agreement, fee waterfall, risk disclosures, valuation policy, audited information and any side-letter terms applicable to you.
Is SEBI registration enough to prove an AIF is good?
No. Registration means the fund operates within the regulatory framework; it is not a performance endorsement.
What is the most important private-market metric?
No single metric is sufficient. Use net IRR, MOIC, DPI, TVPI, realised losses and an appropriate public-market comparison.
How much manager co-investment is enough?
There is no universal number. Focus on whether the amount is economically meaningful to the manager and invested on comparable terms.
Why does valuation independence matter?
Because illiquid assets lack continuous market prices. Independent valuation reduces, but does not eliminate, subjectivity.
Should I invest if I may need the money in three years?
Many AIFs are poor fits for near-term liabilities because fund lives and exits can extend for years.
Key Takeaways
- Review strategy, manager, realised track record, fees, liquidity and governance before return forecasts.
- Capital calls can create liquidity risk even before portfolio losses occur.
- Headline IRR should be supported by DPI and other cash-flow metrics.
- Independent valuation and operational controls matter for illiquid assets.
- SEBI registration is not an investment-quality endorsement.
- The final question is whether the AIF adds enough value to justify its fees, complexity and illiquidity.
Conclusion
AIF due diligence should answer three questions: what produces the return, what can permanently impair capital and whether the investor can tolerate the liquidity and cash-flow structure.
A sophisticated product is not automatically a superior product. The strongest AIF is one whose strategy, governance, fees and risks are understandable—and whose role in your portfolio is clear before you commit.