The 5 Questions Every Accredited Investor Should Ask Before Saying Yes
Most accredited investors say yes too fast. Here are the 5 questions that separate good deals from bad ones.
The 5 Questions Every Accredited Investor Should Ask Before Saying Yes
The Due Diligence Framework You Need Before Writing a Check
You're about to commit $50K, $100K, or $250K to an alternative investment. You have a glossy pitch deck and a charismatic manager. Everyone else seems confident.
Before you become a statistic, ask these five questions. Every. Single. Time.
Question 1: "What's Your Actual Track Record in This Specific Investment Type?"
Not their general track record. Their track record in THIS specific deal type, this specific sector, in THIS market cycle.
A PE manager who crushed it in software buyouts might be terrible at real estate. A real estate investor who thrived during the 2012-2019 low-rate environment might be underwater in 2024. Sector matters. Timing matters.
What to ask for:
- Their last 3-5 comparable exits in this sector
- IRR and MOIC (Multiple on Invested Capital) for those exits
- The timeline (when they bought, when they sold, total holding period)
- Proof they actually made the money (not just projected returns)
Red flags:
- "We don't disclose specific track records" (means the track record is weak)
- Highest returns are from 10+ years ago (market changed, playbook might be outdated)
- They can't name specific companies (they didn't actually invest; they had an ownership stake but didn't control outcomes)
- MOIC and IRR numbers seem fantastic (3x+ returns with low volatility doesn't exist; if the pitch shows it, they're either lying or misrepresenting risk)
Question 2: "What Are My Liquidity Terms, and What Could Go Wrong?"
When you invest, when can you get your money back?
For private equity: you're locked up for the fund's life (usually 10 years) with quarterly distributions. You can't call your money early just because you need it.
For real estate partnerships: distributions might come in year 3-5, but you're illiquid until exit (which could be 5-10 years out).
For oil & gas: you might never get a full return of principal if the well doesn't produce.
What to ask for:
- Exact distribution schedule (when do I see money back?)
- Can I exit early? At what discount? (answer: usually you can't, or you lose 20-30%)
- What happens if the deal underperforms? Do I have rights to intervene? Can I fire the manager?
- Are there clawback provisions? (if the manager returns capital early, then it falls short later, you might have to return money)
Red flags:
- "You won't need the money for 10 years, right?" (assumes you're only ever accumulating, never withdrawing)
- No clear distribution schedule (vague language like "opportunistic distribution of gains")
- Clawback terms are weak or missing (you need protection if the deal goes sideways)
- Management can raise capital midstream (they might ask for more money when deals go bad)
Question 3: "What Happens If This Deal Goes Bad? How Do You Get Paid?"
Here's the uncomfortable truth: in many alternative investments, the manager gets paid management fees regardless of performance.
A PE fund charging 2% annually on a $500M fund gets $10M/year in management fees. Even if the fund bombs, the GP made $100M in fees over 10 years.
That's a misaligned incentive. The GP makes money whether you do or not.
What to ask for:
- What % of compensation comes from management fees vs. carried interest? (best funds: 70% from carry, 30% from fees; worst funds: 70% from fees, 30% from carry)
- Do management fees decline after poor performance years? (strong alignment: fees drop if returns disappoint)
- What happens if the fund underperforms? Do I get preferences over the GP? (a deal that returns 6% when projected to return 12% should mean you get first claim on capital)
- Is there a "clawback" of GP fees if the fund underperforms? (rare, but essential for true alignment)
Red flags:
- GP gets 2%+ fees on AUM with no performance incentive (they're eating well regardless)
- GP has no personal capital in the fund (no skin in the game)
- Carried interest is shared equally among all GPs (the partner bringing in capital gets the same carry as the associate doing the work; misaligned)
- No clawback provision (if the fund underperforms, you can't claw back management fees)
Question 4: "Who Are the Other LPs, and How Aligned Are You Really?"
LPs matter. Institutional LPs (pension funds, endowments, foundations) ask harder questions, negotiate better terms, and monitor performance.
If a fund is 80% retail accredited investors and 20% institutions, the manager is probably not managing to the same standard they'd use for a pension fund.
What to ask for:
- Who are the other LPs? (names matter; if Harvard's endowment is in the fund, that's credibility)
- What % of capital comes from institutions vs. retail? (more institutions = higher standard)
- Have any major LPs exited? If so, why? (if large LPs are selling, that's a warning sign)
- How is capital called? (equally pro-rata, or do some LPs get preferred treatment?)
Red flags:
- Manager won't disclose LP mix (hiding something)
- Fund is 100% retail accredited investors (no institutional scrutiny)
- Some LPs get preferential terms (you want equal treatment; if the manager gives someone else better terms, they're not aligned with you)
- LP concentration is high (if 30% of the fund comes from one investor, that's political leverage)
Question 5: "What's Your Personal Net Worth, and How Much Are You Personally Risking?"
Ask the GP directly: how much of your own money is in this fund?
Top-tier PE managers have 10-25% of their personal net worth in their own funds. That's real skin in the game.
Bottom-tier managers have <1% in their own funds. They're managing your money, not their own.
What to ask for:
- What % of the GP's net worth is invested in this fund? (should be 10%+)
- How much has the GP personally deployed into deals? (not just the fund, actual capital at risk)
- If a deal goes underwater, will the GP invest more to save it? (commitment to the portfolio)
- What's the GP's downside? Can they afford to lose if this fund underperforms? (if they can absorb losses, they'll make better decisions)
Red flags:
- "I'm 100% invested in my own funds" (true, but be careful they're not overexposed to one fund)
- "My net worth is private" (might be hiding small personal investment)
- GP has no personal capital at risk (you're the only one risking money)
- GP is juggling multiple funds simultaneously (attention divided; execution suffers)
The Bonus Question: "What Are You NOT Telling Me?"
The best managers will volunteer risks. They'll say:
"This is a commercial real estate fund in a market facing rising cap rates. Leverage is critical to returns. If we can't refinance in year 5, returns drop 30-40%."
Or:
"We're acquiring companies with significant customer concentration. If we lose a customer, EBITDA drops. That's the risk we're taking."
If a manager is hiding risks or being evasive, they know something you don't.
Your Action Plan
Before you write ANY check to an alternative investment:
- Get the track record (specific to this deal type, this sector, recent performance)
- Understand the lock-up (when can you get your money back?)
- Model the downside (what if returns are 50% of projections?)
- Understand the fee structure (is the GP aligned with you?)
- Know who else is in the fund (are they smarter than you?)
- Evaluate the GP's skin in the game (are they risking real capital?)
- Ask the uncomfortable questions (what's the real risk here?)
This is basic due diligence. It takes 4-6 hours per opportunity. If you're not willing to invest that time, you're not serious about making smart decisions.
Conversely, if you ask these questions, you're in the top 10% of sophisticated investors. Most people just sign the docs and hope.
For informational and educational purposes only. Not investment advice. Consult your financial advisor and attorney before making investment decisions.