Due diligence questionnaire (DDQ) review of a $1.5 billion buyout fund

A due diligence questionnaire (DDQ) is the set of written answers a fund manager gives to an investor’s standard questions on the firm, the team, the strategy, the terms, the track record and the operations. In private equity the standard is the ILPA DDQ 2.0, whose 20 sections most limited partners send or accept; hedge fund investors use AIMA’s. The DDQ is where diligence starts, not where it ends: every answer is tested against the rest of the data room.

This page works one LP’s diligence on Tarnwick Capital Partners V, an illustrative $1.5 billion fund raised by a Chicago manager of North American mid-market buyouts, from the manager’s data room: the DDQ, a PPM excerpt, the LPA terms summary, a track record workbook with every deal and LP cash flow, audited fund financial statements, a quarterly report, a valuation memo, operational due diligence (ODD) responses and Form ADV. The manager’s materials lead with two claims: “Fund III: 3.6x gross MOIC and 38% gross IRR on realized investments”, and first-quartile Funds III and IV. The diligence changes six things:

• The headline is seven of 38 deals. The PPM’s 3.6x is Fund III’s realized deals; all of Fund III is 3.01x gross and 2.38x net, and all four funds 2.32x gross.
• One deal and one departed partner carry Fund III. Bracken Fluid Systems is 38% of Fund III’s gains; without it the fund is 2.36x. Its deal lead, a co-founder who retired in 2024, led deals worth 31% of all four funds’ gains.
• Fund IV’s IRR leans on the subscription line. The line peaked at 38.9% of commitments and LPs saw no capital call for 269 days after the first deal. Net IRR is 14.5% as reported and 11.8% without the line, and the fund trails the Russell 2000 (KS-PME 0.91).
• The largest mark needs multiple expansion. Pellston Software Services is held at 2.42x on 16.5x run-rate EBITDA that includes synergies not yet achieved. At the 13.0x peer median on LTM pro forma EBITDA it is 1.04x, and Fund IV’s net TVPI falls from 1.43x to 1.31x.
• Fund V’s terms move against LPs. A deal-by-deal waterfall with no escrow would have paid the GP $120.9 million of carry on Fund III before LPs had their capital back.
• The DDQ is contradicted by the manager’s own documents in four sections, among them a 2024 SEC deficiency letter the DDQ calls a routine exam with no material findings.

The recommendation is a $50 million commitment on eight conditions: four LPA changes, a side letter and three items before first close, set out in the memo.

The DDQ against the data room

Of the 20 sections, four answers are contradicted by another document in the room, and most of the rest are accurate but incomplete. The DDQ is a disclosure document: each answer is read next to the evidence for it.

Tarnwick’s ILPA DDQ 2.0 response, one row per section, checked against the PPM, LPA terms summary, track record workbook, audited statements, quarterly report, valuation memo, ODD responses, Form ADV and team file. From Compound’s DDQ Review tab (Tarnwick ODD and DDQ Review.xlsx).

The contradictions matter more than their number. DDQ 13.1 says the firm’s 2024 SEC examination “was routine and did not result in any material findings”; the ODD responses disclose a deficiency letter dated November 12, 2024 on broken-deal expenses charged to Funds III and IV, and the audited statements note $1.1 million reimbursed to their limited partners. The same allocation reappears in the Fund V draft LPA. DDQ 18.1 says there was no material cybersecurity incident; the ODD responses describe a $2.4 million wire released on a spoofed email in August 2023 and stopped by the receiving bank. Two answers are silent where the appendices are not: 7.9 declines to report net IRR without the subscription facility, and 14.5 lists four losses but not the two Fund III companies held at 0.29x and 0.18x. The track record is where the questionnaire’s claims are tested.

Rebuilding the track record

Rebuilt from the deal and LP cash flows, every figure in the manager’s track record ties. The question is which figures the PPM chose to lead with: across all deals the four funds return 2.32x gross, and Fund III 3.01x gross and 2.38x net.

The PPM’s “3.6x on realized investments” is Fund III’s seven exits. The fund’s two losses are still held, so a realized-only figure leaves them out; without Bracken the exits return 2.71x.

The subscription line

Fund IV borrowed every investment, fee and expense against LP commitments for up to 360 days. Reported net IRR of 14.5% falls to 11.8% when each contribution is moved back to the day the line was drawn.

The line peaked at $447.5 million, 38.9% of commitments, within Fund IV’s own 40% limit but nearly twice ILPA’s 20%; Fund III’s line stayed at 90 days.

Fund IV invested $220.0 million before its first LP capital call, on March 26, 2022, and paid $51.5 million of facility interest. The line raises the IRR LPs see and lowers the multiple they receive. Against the manager’s own benchmark it is also the difference between a first-quartile and a second-quartile fund.

Against public markets and peers

Fund IV is first quartile only on net IRR with the line: without it, and on TVPI, it is second quartile on the manager’s own breakpoints, and it trails the Russell 2000 with a KS-PME of 0.91. Fund III is first quartile on every measure, with a KS-PME of 1.62.

A KS-PME above 1.0 means the LPs did better than the same contributions and distributions invested in the index; direct alpha is the annual rate of that outperformance. Fund III’s 13.6% direct alpha is a strong result for a 2017 vintage. Fund IV’s (3.5%) is measured at the manager’s marks, which the next sections test. The breakpoints are the manager’s, a benchmark at March 31, 2026 set against Tarnwick’s June 30 figures, and are treated here as illustrative.

Dispersion, losses and one big winner

Fund III’s spread of outcomes is three times Fund I’s: a 9.4x exit at one end and two companies near zero at the other. Across 38 deals, 12.5% of cost sits in deals below 1.0x and 7.1% of invested capital has been lost.

Most of the capital earned 2.0x to 3.0x; the median deal returned 2.43x. The track record is a consistent mid-market book with one outlier, not a run of large winners.

Daniel Okafor, the co-founder who retired in 2024, led deals worth 31% of all four funds’ gains at 3.14x; without Bracken his deals return 2.11x. The partners raising Fund V have a 1.73x to 2.29x record.

Revenue growth created 38% of the gain on Fund III’s exits and multiple expansion 33%. Without Bracken, which was bought at 8.0x and sold to a strategic at 16.0x, multiple expansion falls to 12%.

The operating record behind the exits is real: revenue growth and margin explain 52% of the gain, and Bracken’s own gain was 60% multiple. That matters for Fund V, because the funds still holding most of Tarnwick’s value, Funds III and IV, are marked rather than sold.

Testing the largest mark

Pellston Software Services, 20% of Fund IV’s LP NAV, is marked at 2.42x cost: 16.5x run-rate EBITDA of $36.0 million, which includes $12.0 million of acquired EBITDA and $3.0 million of synergies not yet achieved.

Organic EBITDA is $0.8 million below where it was at entry. All of the growth in the mark’s EBITDA was bought with debt or has not happened yet.

At the 13.0x peer median on LTM pro forma EBITDA, Pellston’s equity is $125.0 million, 1.04x cost. At the entry multiple of 11.0x on the run-rate, it is 0.77x: the mark’s whole gain is multiple expansion.

Re-marking Pellston alone takes Fund IV from 1.83x to 1.65x gross, net TVPI from 1.43x to 1.31x and net IRR from 14.5% to 10.9%.

The mark was prepared by the deal lead and approved unchanged by a Valuation Committee made up of the three partners, under a policy that allows run-rate EBITDA, unachieved synergies and a premium to the peer multiple; no independent valuation firm reviews it. None of this makes the mark wrong. It makes it the manager’s view, and an LP prices Fund IV on its own.

Fund terms against the ILPA Principles

Fund V’s draft terms are weaker than Fund IV’s on the waterfall, the clawback, the GP commitment, key person and governance, and below ILPA Principles 3.0 on each. The fee and carry rates are unchanged; the protections around them are not.

Fund V’s draft LPA terms summary (September 2026) against Fund IV and ILPA Principles 3.0 (2019), quoted. From Compound’s Terms vs ILPA tab (Fund V Terms Review.xlsx).

Run on Fund III’s actual exits, the Fund V waterfall would have paid the GP $120.9 million of carry before LPs had their capital back, and $29.6 million more than Fund III’s whole-of-fund waterfall paid through March 2025.

A 30% escrow, ILPA’s example, would have held $58.3 million by March 2025. With no escrow and a clawback that is net of taxes and owed only by the GP entity, an LP’s protection against early carry is the GP’s willingness to repay it at the end of the fund’s term. The ask, in priority order: a whole-of-fund waterfall; failing that, 30% escrow, an interim clawback gross of tax and personal guarantees; the GP commitment in cash; key persons Ellis, Calloway and Achterberg with Ellis alone a trigger; simple-majority suspension and two-thirds removal; and a facility capped at 20% of commitments and 180 days, with the preferred return running from the draw date.

Operational due diligence red flags

The operational review finds seven high-severity red flags, eight medium and one low. The common thread is a firm that has grown to a $1.5 billion fund on the controls of a smaller one.

Operational due diligence red flags from the ODD responses, Form ADV, audited statements, valuation policy and memo, team file and LPA terms summary. Each carries an ask in the workbook. From Compound’s Red Flags tab (Tarnwick ODD and DDQ Review.xlsx).

Most of these are fixable before closing: a named third-party administrator for Fund V, an independent valuation review of positions above 5% of NAV, the SEC correspondence and a corrected DDQ, a written co-investment allocation policy, a SOC 2 report for the IT provider, and the expense allocation fixed in the LPA. They become the conditions in the memo.

The commitment memo

Tarnwick Capital Partners V: commit $50 million, conditional

To: Investment Committee. From: Fund due diligence team. Date: 22 Oct 2026. Performance as of 30 Jun 2026; data room of September 2026; US$ throughout.

Recommendation: commit $50m, conditional on eight terms and remediation items

The memo recommends a $50m commitment to Tarnwick Capital Partners V, L.P., 3.3% of the $1.5bn target. Funds I to III beat the Russell 2000 and Fund III ranks first quartile, but the record leans on one exited deal led by a partner who has left, Fund IV trails the index and rests on a Pellston mark the LP case cuts by more than half, and the draft LPA is weaker for LPs than Fund IV on 13 of 21 terms. The commitment sits below a full allocation, and only once the manager agrees the following in the LPA, a side letter or before first closing.

1. LPA, waterfall: whole-of-fund, as in Funds III and IV; fallback only an ILPA-form deal-by-deal waterfall with a 30% carry escrow.

2. LPA, clawback: interim clawback, gross of tax, backed by joint and several guarantees from every carry recipient.

3. LPA, key persons: Ellis, Calloway and Achterberg; Ellis alone or any two trigger an automatic suspension, two-thirds to reinstate.

4. LPA, alignment and leverage: GP commitment of 2% fully in cash; facility and each borrowing capped at 20% of commitments and 180 days, with the preferred return from the draw date; broken-deal costs shared with co-investors.

5. Side letter: net IRR with and without the facility; co-investment policy and offer log; SOC 2 within 12 months; higher cyber and crime cover; an LPAC seat; notice of regulatory matters and CFO or CCO departures.

6. Before first close: signed engagement of a named third-party administrator for Fund V, with shadow administration of Fund IV.

7. Before first close: independent valuation of Pellston, or a re-mark excluding unachieved synergies, and an annual independent review of positions above 5% of NAV.

8. Before first close: the SEC deficiency letter and the Firm’s response, and a re-issued DDQ correcting sections 5.2, 12.2, 13.1, 13.2, 14.5 and 18.1.

The manager and the strategy: a consistent mid-market program run by three partners

Tarnwick makes control investments in North American lower-middle and middle-market business services and industrial technology companies with enterprise values of $75m to $400m, buying founder-owned businesses and carve-outs, building them through add-ons and selling to strategics and larger sponsors. Since 2010 it has invested $2.2bn across 38 platform investments in four funds. Fund V targets $1.5bn with a $1.8bn hard cap, against $1.15bn for Fund IV.

Founder Margaret Ellis chairs the Investment and Valuation Committees, owns 70% of the Firm and is proposed for 40% of Fund V carry. Ruth Calloway and Simon Achterberg are the other two Partners, supported by three principals, four vice presidents, four associates and an operating team of three. Co-founder Daniel Okafor retired in March 2024 and is a senior advisor; none of the principals, who joined between 2014 and 2018, has been made Partner.

Track record as the LP sees it: good, but narrower than the PPM headline

Table 1. Funds I to IV recomputed from the manager’s cash flows, 30 Jun 2026

Source: Fund Due Diligence Workbook (Track Record, Sub Line, PME and Quartile tabs); Tarnwick Deal-Level Analysis (Summary). Quartiles use the manager-provided PPM footnote 4 breakpoints, which are illustrative and dated 31 Mar 2026; Funds I and II used no facility.

The PPM leads with 3.6x gross MOIC and 38% gross IRR on Fund III’s realized investments. That covers 7 of 11 deals ($435m invested, 3.63x), and Bracken alone returned 9.42x; the other six realized deals return 2.71x. Across all 11 deals Fund III is 3.01x gross, 2.38x net TVPI and 25.0% net IRR; Funds I to IV pooled are 2.32x gross and 1.82x net. The headline leaves out Corliss Staffing (0.29x) and Marlow Print Solutions (0.18x), both written down. A recomputation from the manager’s cash flows ties to its reported figures with no differences outside rounding.

Gross to net, pooled returns fall from 22.8% to 18.0%, a 4.8-point and 0.50x spread. The subscription facility flatters Fund IV most: its 14.5% net IRR is 11.8% without the facility, a 2.7-point uplift against 1.7 points in Fund III. Fund IV called no LP capital for 360 days after initial closing, by which time $220m was invested, and its facility peaked at $447.5m, 38.9% of commitments, against ILPA’s 20%. The manager does not report the ex-facility figure (DDQ 7.9).

Against public markets, Funds I to III beat the Russell 2000 Total Return index, with direct alpha of 2.5%, 5.0% and 13.6% a year; Fund IV trails it at a 0.91x PME and (3.5%). On the manager-provided breakpoints, treated here as illustrative, Fund III is first quartile on every measure. Fund IV is first quartile only on the facility-boosted IRR: without the facility its 11.8% sits below the 14.0% upper quartile, and its 1.43x TVPI below the 1.45x upper quartile.

The repeatable base is the median deal, 2.43x across 38 deals, with 12.5% of cost in six deals marked below 1.0x ($278m) and 7.1% of invested capital lost; Fund II has the highest loss ratio at 18.0%. Fund III’s 2.41x dispersion is one outlier. Bracken Fluid Systems (9.42x, $505m gain) is 38% of Fund III’s net gain, and without it Fund III is 2.36x; 60% of Bracken’s gain came from multiple expansion (8.0x entry to 16.0x exit), against 12% for the other six realized deals. Bracken’s lead, Daniel Okafor, led 31.1% of all gain across Funds I to IV at 3.14x (2.11x excluding Bracken) and has no Fund V carry. The partners who stay have led deals at 2.28x (Ellis), 2.29x (Calloway) and 1.73x (Achterberg). On balance, underwrite Fund V near the 2.3x gross the remaining partners have delivered, not Fund III’s 3.01x.

The unrealized portfolio: Pellston carries Fund IV, and the LP case halves it

Pellston Software Services, Fund IV’s largest holding at 20.5% of LP NAV, is marked at $290m of equity, 2.42x cost, on 16.5x run-rate EBITDA of $36.0m. The run-rate includes $3.0m of synergies, none achieved; organic EBITDA of $21.0m is 3.7% below entry, so the growth is acquired. Re-rating from 11.0x at entry to 16.5x adds $198m against a $170m equity gain, and at the entry multiple the stake is worth 0.77x cost. Net debt is 9.2x LTM pro forma EBITDA. The deal lead prepared the valuation and votes on the three-member committee, whose voting members hold 59% of Fund IV carry, with no independent valuation agent.

Table 2. Pellston and Fund IV: manager’s mark against the LP case

Source: Pellston Mark Test (Summary). LP case: 13.0x peer median on LTM EBITDA pro forma for acquisitions, excluding unachieved synergies; LP NAV change is net of lower accrued carry.

The LP case puts Pellston at $125m, 57% below the mark. Fund IV then falls to 1.31x net TVPI and 10.9% net IRR, around the 1.30x illustrative median rather than the first quartile. Excluding Pellston, Fund IV is 1.74x gross, with 42.6% of cost in deals at 1.0x to 2.0x and none above 3.0x.

Terms: five asks against ILPA Principles 3.0, in priority order

Fund V’s draft terms are weaker for LPs than Fund IV’s on 13 of 21 terms reviewed and below ILPA Principles 3.0 on 7 more; only the fee step-down is in line, although the DDQ calls the terms substantially unchanged. The waterfall and clawback come first because they decide when the GP is paid and whether LPs can get it back.

Table 3. Priority asks

Source: Fund V Terms Review (Summary, Terms vs ILPA, Fund III Carry, Fees and GP Commitment); ILPA Principles 3.0 (2019) page references; Fund V LPA Terms Summary (Draft, September 2026).

The next tier: start the investment period at initial closing (as drafted, a first-close LP pays 2.0% for up to 6.25 years); a 100% fee offset (the Manager kept $4.4m of transaction fees in Funds I to IV); Fund IV’s two-thirds no-fault thresholds; LPAC consent to term extensions; a 115% recycling cap; a $2.0m organizational cap; and a 75% successor-fund test.

Operational due diligence: seven high-severity red flags, each tied to a condition

The review found seven high, eight medium and one low red flag. Four DDQ answers are contradicted by the Firm’s own documents and 11 more are qualified, and 28 requests to the manager are open.

Table 4. Red flags and the condition that fixes each

Source: Tarnwick ODD and DDQ Review (Summary, Red Flags); PPM Excerpt (September 2026), Section VIII. Severity: rows one to six high, rows seven to nine medium.

Portfolio fit and sizing: a 3.3% position, held below a full allocation

Fund V adds a North American lower-middle and middle-market buyout manager focused on business services and industrial technology. The diligence file holds no data on the LP’s existing private equity exposures, so overlap and pacing are not tested here; this is a gap to close against the program model before closing.

At $50m the LP holds 3.3% of the fund at target and 2.8% at the hard cap. With a 15% single-investment limit, the LP’s look-through exposure to any one deal is at most $7.5m. The fee is $1.0m a year, and as drafted a first-close LP pays 2.0% for up to 6.25 years, $6.25m in total. With half the GP commitment met by fee waiver, the GP’s minimum cash is $15m, so the commitment would be 3.33x the GP’s own cash.

Why not more: the repeatable base is the 2.43x median deal, not Fund III’s 3.01x; Fund IV trails the index and drops to 1.31x net TVPI on the LP’s Pellston case; the partner behind the best deal has left; and the controls do not yet match a fund 30% larger than Fund IV. A larger commitment would raise the LP’s exposure while the evidence for the strategy is weakening.

Risks and what would change the recommendation

• Succession: Ellis owns 70% of the Firm and controls both committees; no principal has been made Partner.

• Marks: every holding is Level 3 and set by the deal partners; Pellston’s Q2 enterprise value rose $42m, $18m of it from raising the multiple.

• Repeatability: the best result came from one deal, mostly multiple expansion, led by a partner who has left.

• Conflicts: the GP will act on both sides of the Wycliffe continuation vehicle in Fund II.

• Disclosure: four DDQ answers conflict with the Firm’s own documents, so every remaining answer needs verification.

The LP declines if the manager refuses the waterfall and clawback asks (conditions 1 and 2) or will not sign an administrator before first close, or if the SEC correspondence shows findings beyond broken-deal costs. It reduces or declines if an independent Pellston valuation comes in near the $125m LP case and the manager will not re-mark. It holds at $50m even if every condition is met, and revisit the relationship at Fund VI on Fund IV’s realized outcome.

Open items for the manager before closing

Of the 28 open requests, these must be answered before closing.

• GP positions on the key person, carry escrow or whole-of-fund waterfall, clawback guarantees, investment period from initial close, and broken-deal sharing.

• Fund V administrator: name, scope, fee, signed engagement letter and timing of Fund IV shadow administration.

• SEC deficiency letter of 12 Nov 2024, the January 2025 response and the $1.1m reimbursement calculation; re-issued DDQ signed by the CCO.

• Pellston: the six comparables, the private transactions cited at 15x to 18x, monthly organic EBITDA, and willingness to engage an independent valuation firm.

• Net IRR with and without the facility for Funds III and IV in the ILPA Performance Template, and why Corliss and Marlow were left out of DDQ 14.5.

• Co-investment allocation policy and offer log; Wycliffe process, fairness opinion and status-quo option.

• Managed service provider SOC 2 and penetration tests, wire incident post-mortem, insurance plan, CCO separation and a written succession plan.

Methodology. Tarnwick Capital, its funds, people, portfolio companies and documents are fictional; the example is illustrative. Every figure comes from its data room and from the analysis workbooks built in Compound from it. Public market equivalents use the Russell 2000 Total Return index, monthly, from Compound’s market data. The quartile breakpoints are the manager’s, from a footnote in its PPM, and are illustrative. ILPA positions are quoted from the ILPA Due Diligence Questionnaire 2.0 (November 2021) and ILPA Principles 3.0 (2019). Gross figures are deal-level before fees and carried interest; net figures are for the aggregate limited partners.

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