Private equity and hedge fund investors face significant operational and investment risks that can substantially decline their assets. However, these risks can be effectively managed through operational due diligence (ODD), which entails a comprehensive review of activities and operational risks throughout the company.

What is operational due diligence for private equity companies?

Operational due diligence (ODD) represents a thorough inquiry into the operational aspects within alternative investment entities, such as private equity funds, hedge funds, or infrastructure funds. The purpose of an ODD exercise is to determine whether the target’s operational infrastructure can support the investment strategy. It usually involves analyzing the target company’s operations, processes, performance, and current and future goals. Through this process, private equity professionals can determine if an investment is worth the risks.

Operational due diligence takes on added importance for private equity firms. The thing is, PE firms typically invest in privately-held companies, so more information is needed to assess the investment risk and rewards.

Additionally, private equity firms often take an active role in managing the businesses they invest in, which means the due diligence process must evaluate the company’s current state and its potential for improvement and growth under the PE firm’s management.

Overall, private equity operational due diligence requires a thorough and nuanced approach to evaluating the investment’s operational risks and potential for success.

What are the objectives of operational due diligence?

The key objectives of ODD are as follows:

  1. Evaluate the long-term sustainability of the target company’s operations without requiring additional investment beyond their existing business plan.
  2. Identify potential actions and investments the target’s management may have overlooked to accelerate future value-creation opportunities.
  3. Provide guidance to the deal team on the strategic alignment of the proposed transaction.
  4. Involve all stakeholders in the change process.

According to ODD objectives, the procedure is similar to a check-up. It gives an in-depth look at the company’s current state, allowing the buyer to make an informed decision before committing to the purchase. Other types of due diligence are more like X-rays and blood tests — they provide a more detailed look at specific areas to ensure the buyer has a complete picture.

We have compared ODD with other types done with due diligence data rooms, such as commercial, legal, financial, and tax DD, to show you the differences:

ObjectiveProtect valueCreate value
OrientationBackward lookingForward looking

When conducting operational due diligence process, several peculiarities need to be considered. So, we’ve compiled a list of these peculiarities to help you fully comprehend the process and make well-informed decisions.

1. Forward-looking

The ODD process is forward-looking with a focus on creating more shareholder value. Commercial due diligence assesses the market’s attractiveness and the target’s relative strengths compared to its competitors. ODD, in turn, uses this information to answer the question, “what should we change about the way we operate to boost shareholder value?”

2. Opportunity-based

It’s important for M&A deal teams to conduct balanced due diligence that takes into account potential benefits and risks. The procedure helps acquirers balance risks and opportunities, allowing them to shift the focus from avoiding risks to looking for opportunities.

3. Bespoke

Unlike financial or legal DD, there is no fixed way of approaching ODD, as each deal is unique and requires a tailored scope based on the deal rationale, structure, industry, and specific operational risk of the company.

ODD aims to answer questions about the robustness of operations, the operational upsides and full potential of the target, and the post-merger synergies that can be expected.

4. Continuous

ODD is a lengthy process that starts during the target selection phase and goes on throughout the transaction cycle. To negotiate and draft the SPA in an efficient way, you should consider not only financial and legal due diligence results but also implement ODD findings into the value creation plan. This way, you get support from both target and divisional management.

5. Collaborative

For a successful business deal, it is imperative that the ODD team and management collaborate closely to execute a proper value-creation plan. This entails a prioritized set of value-boosting opportunities and an action plan to mitigate execution risks. The project must strategically identify areas for performance improvement and synergistic solutions.

6. Iterative

The process follows an iterative approach that focuses on answering the question of how a transaction can create value. It involves testing and improving hypotheses until they cannot be further broken down. This approach fosters stakeholder collaboration, the use of various information sources, and creativity, resulting in valuable insights that can be acted upon.

The corporation acquiring the target company is responsible for carrying out operational due diligence, but this can only be done with the target management’s participation. And while external ODD consultants can offer more specialized knowledge and significantly improve the standard of operational analysis, they can’t replace target managers.

ODD checklist for private equity

A comprehensive operational due diligence checklist is an absolute necessity for private equity firms to evaluate investment opportunities and proactively identify potential risks. So, here is an outline of the key ODD checklist components:

  • Methods of mark-to-market valuation and related policies, controls, and disclosures
  • Disaster recovery and business continuity plans
  • Behavioral analysis of people and outsourced service providers
  • Fraud risk and other irregularities
  • Liquidity mechanisms
  • Security of assets
  • Legal review (it may be done separately as legal DD and cover the design and establishment of the legal structure, the advice the alternative investment fund and its manager took, investment terms, material contracts, indemnifications, and insurances)
  • Review of processes and controls used by the fund through its key external service providers (fund administrator, investment manager, etc.) in relation to the management of the fund’s assets to determine if they are appropriate and being followed.
  • Review of operational procedures and maintenance of documentation supporting taxes associated with maintaining a preferential tax regime or keeping the funds in an offshore zone.

Streamline ODD with virtual data rooms

The ODD process can be a formidable challenge for targets, investors, asset managers, and other parties. Fortunately, virtual data rooms have emerged as a valuable tool in streamlining this process.

Centralized data storage

Virtual data rooms simplify ODD by centralizing all relevant documents and data in one location. It eliminates the need for physical data rooms, which are time-consuming and costly.

Advanced data security

Data rooms offer advanced security features, such as watermarks, two-factor authentication, fence views, and user permissions. This way, you can rest assured that sensitive data is protected and accessed by authorized users only.

Increased efficiency

Organizations can improve the process with VDR by increasing efficiency. Specifically, the ability to quickly and securely share information with all parties involved accelerates the overall timeline of the deal.

Close activity monitoring

With data rooms, you can identify potential risks and breaches before they occur. By monitoring user activity, it is possible to detect any unusual behavior or suspicious activity that may indicate a security breach. It can help prevent sensitive data from being compromised and ensure that all users follow established security protocols.


Performing an ODD is crucial when investing, as it can reveal any warning signs that may not be on the surface. This process is complicated, requiring investors to possess significant expertise to assess the risks of a specific investment. Lacking this significant expertise could result in overlooking critical details and substantial losses. However, by identifying these risks early on, investors can make informed choices and take measures to minimize any possible problems before they affect their investment.