Key Takeaways

  • Over half of the private markets funds underwritten by NEPC over the past decade were Funds 1 through 4, driven by institutional appetite for early-vintage outperformance.
  • Standard institutional diligence at the firm applies an audit of more than 250 questions, which often eliminates early managers due to a lack of back-office headcount.
  • NEPC filters roughly 100 private markets candidates per year down to 5 to 10 allocations on a dedicated discovery platform that streamlines operational screening.
  • The framework accepts clear operational gaps on debut funds, giving managers room to hire a chief operating officer and complete registrations before seeking a full rating on their next vintage.

Institutional Due Diligence Disqualifies Early Outperformance

Tim McCusker directs investment strategy at NEPC, an institutional advisory firm overseeing roughly $2 trillion in client assets. When pension funds and endowments seek private market exposure, they search for alpha that multi-billion-dollar incumbents struggle to match. They want disciplined, early-stage fund sizes with focused execution.

Institutional risk frameworks, however, were constructed to reject early-stage setups. NEPC runs an audit of more than 250 questions that every manager researcher must follow across public and private assets. For an established firm with internal legal and compliance staff, that questionnaire is straightforward. For a spinout team raising a debut vehicle, it can be fatal.

McCusker found that strict institutional processes created an unintended filter. As he put it: “Over half of the private markets funds that we've underwritten over the last decade have been in fund one, two, three, or four. So it is a primary focus for us to find those newer ideas.” Yet applying the standard 250-question filter directly to debut vehicles creates a structural roadblock: “Every manager researcher that we have across public and private markets, they're going to follow a very similar framework of 250 plus questions that's exhaustive across all aspects of the organization, the people.” That friction automatically discarded managers whose investment talent was proven but whose back office was incomplete.

The Discovery Track Accepts Operational Deficits for One Vintage

To resolve that tension, NEPC designed an explicit alternative path called the discovery platform.

Each year, the firm reviews approximately 100 private markets ideas alongside 100 long-only public managers. From those 100 private candidates, NEPC routes a select group into an alternative due diligence pipeline. McCusker explained: “It's five to 10 ideas that go through a more streamlined process that recognizes it's very explicit about what those extra risks are and it's very clear to an investor what they're taking on.”

This mechanism separates pure dealmaking capability from administrative overhead. A new investment team does not need an institutional back office on day one to access pension and endowment capital. Instead, NEPC documents the operational absences, presents them transparently to clients willing to absorb operational risk for return potential, and allows the manager to launch.

The runway is strictly finite. The discovery status functions as a bridge, giving emerging GPs the management fees necessary to professionalize their operations. As McCusker observed: “Other times we see some of those risks that we were worried about get built out. We see them add a COO. We see them get the right registrations and we bring them through on their next fund for a full one rating for all of our clients.”

Why It Matters

This framework signals that institutional gatekeepers now view rigid operational audits as a direct threat to portfolio returns. When a gatekeeper with $2 trillion in advisory assets builds a deliberate detour around its own 250-question screen, it proves that standard LP diligence filters out the very alpha institutions exist to capture. For emerging managers, the takeaway is clear: allocators do not expect institutional back offices on day one, but they do require GPs to convert early returns into back-office infrastructure before raising Fund II.