Sure, performance metrics, fund size, and historical returns are essential. But if you’re making decisions based on numbers alone, you’re missing the bigger picture. Numbers tell you what happened. But to understand why it happened - and, more importantly, whether it’s likely to happen again - you need context.
That’s where qualitative due diligence comes in. It’s the “story behind the spreadsheet,” shedding light on the people, processes, and philosophies that drive performance. Without it, investment decisions are based only on what is easy to measure rather than what actually determines long-term success.
Understanding how a fund sources deals, constructs portfolios, manages risk, and executes exits is crucial in determining whether strong returns are repeatable, sustainable, and aligned with investor objectives.
In this article, we’ll explore why qualitative research is critical in private fund investing. By the end, you’ll understand how qualitative insights can elevate your decision-making, help you differentiate funds more effectively, and give you greater confidence in your investment strategy.
The Limits of Quantitative Data
Quantitative data provides a foundation for assessing a fund’s performance, but it doesn’t tell the whole story. A fund might show strong historical returns, but what drove that success? Was it superior investment selection, a well-structured risk strategy, or simply market timing and leverage?
Another fund may have experienced a challenging year, but does that mean it’s a poor investment? Or is it pivoting to a more sustainable strategy that has yet to materialize?
Two funds could report the same 20% IRR, but one may have achieved it through steady, long-term value creation, while the other relied on highly concentrated bets in volatile sectors.
Without understanding the underlying investment process and risk exposure, these numbers can be misleading. That is where qualitative due diligence becomes essential - filling in the gaps and providing a more holistic view of a fund’s true strengths, weaknesses, and differentiation factors.
What is Qualitative Data?
Qualitative data goes beyond the “what” to explore the who, why, and how behind a fund’s performance. Investors must assess:
- Who: The team behind the fund. Who are the key decision-makers? What is their track record? Have they worked together successfully for years, or has there been turnover? What is their pedigree—did they come from top-tier investment banks, consulting firms, or highly regarded private equity and venture capital firms? Have they demonstrated success in prior funds or at well-respected institutions before launching their own? A fund’s leadership stability, decision-making structure, and investment discipline can be just as important as past performance.
- Why: The investment philosophy. What drives the fund’s strategy? Does it focus on value investing, growth, sector specialization, or opportunistic market dislocations? Is success driven by repeatable processes, deep sector expertise, or access to proprietary deals?
- How: The investment process, portfolio construction, and risk management. How does the fund source deals—does it compete in auctions or have proprietary access? How many investments does it typically make per fund? Does it take a diversified or concentrated approach? How does it manage leverage, downside risk, and liquidity?
These qualitative insights help investors move beyond performance figures to assess whether a fund’s success is sustainable and aligned with their investment strategy.
Why (and How) to Use Qualitative Data in Private Fund Investing
Private markets are complex, illiquid, and less transparent than public markets. Relying solely on past performance fails to capture the nuances of risk, sustainability, and execution. That is why qualitative due diligence is critical in evaluating private market funds.
Understand What Actually Drives Performance
Performance metrics are outcomes - but qualitative factors like team expertise, investment discipline, sourcing strategy, and portfolio management determine whether a fund’s success is repeatable. A high-performing fund might have benefited from favorable market conditions rather than true investment skill. Another fund with modest past returns may have built the right foundation for future success through disciplined sourcing and strategic investments. Was the success driven by operational improvements, deal selection, or leverage?
These distinctions matter when evaluating whether a manager’s performance is replicable over multiple cycles. By analyzing the people, investment process, and decision-making framework, investors can assess whether a fund’s performance is likely to persist rather than being a one-time anomaly.
Compare Funds More Accurately
Two funds with similar performance metrics can have fundamentally different approaches and risk profiles. Investors need to evaluate what truly differentiates them:
- Sector Focus: A tech-focused growth equity fund faces different risks than an industrial buyout fund.
- Portfolio Construction: Some funds make high-conviction, concentrated bets, while others spread risk across multiple assets.
- Use of Leverage: A fund with a 20% IRR driven by high debt financing carries greater risk than a fund achieving the same IRR through organic growth and operational efficiencies.
- Exit Strategy: Does the fund depend on IPOs, or does it have multiple exit options, such as secondary buyouts or strategic acquisitions?
By incorporating qualitative insights into fund comparisons, investors can make more accurate, risk-adjusted evaluations rather than relying on surface-level performance rankings.
Uncover Emerging Opportunities Early
Many investors gravitate toward established funds with long track records, but this approach can cause them to overlook new managers and niche strategies with high potential. Some emerging funds may lack a long performance history but have a proven leadership team, deep industry connections, and proprietary deal flow. Certain funds operate in high-growth but overlooked sectors, offering access to opportunities that traditional funds may miss. A newly launched growth equity fund, led by experienced investors, may not have an extensive track record but could be well-positioned for long-term outperformance. Qualitative data allows investors to identify funds poised for success before their track records fully materialize.
Align Investments with Your Goals and Risk Tolerance
A fund may have strong returns, but if it does not align with an investor’s objectives, risk profile, or investment horizon, it may not be the right fit. Some investors prioritize capital preservation and may prefer funds with a proven downside protection strategy rather than those focused on aggressive growth. Others may seek higher-risk, high-reward opportunities in sectors like technology, emerging markets, or early-stage venture capital. Investors focused on impact investing or ESG must assess whether a fund’s philosophy and investment framework align with their sustainability goals. Qualitative due diligence ensures that fund selection is based on both financial performance and strategic alignment.
Why Qualitative Due Diligence is Non-Negotiable
Private market investing is not just about selecting funds with the highest returns - it is about understanding what drives those returns and whether they are sustainable. Performance metrics must be contextualized with qualitative factors, including investment philosophy, risk management, leadership stability, and exit planning. Investors who integrate qualitative due diligence into their fund selection process can differentiate between funds based on their true risk-return profile, identify emerging opportunities, and ensure alignment with their investment objectives. A disciplined approach to qualitative analysis leads to more informed and strategic capital allocation decisions in private markets.
Putting Qualitative Data to Work with Dakota Research
If you’re wondering how to gather and analyze all this qualitative data without doubling your workload, you’re not alone. That’s where Dakota Research comes in. Our platform simplifies the process by providing:
- Detailed Fund Profiles: Covering everything from investment strategies to team backgrounds and differentiators.
- Presentations and Reviews: Manager presentation decks and industry opinions on fund strategies in one place.
- Standardized Insights: Making it easy to compare funds side by side.
- Workflow Tool: Keep notes, contacts, presentations, and track the stage of investment due diligence all in one platform.
- Real-Time Updates: Keeping you informed about new and emerging opportunities in private markets.
We take the guesswork out of qualitative data, so you can focus on making informed decisions. Book a demo of Dakota Research for more information!
