Averaging cannot express “this issue is disqualifying”. Adding domains halves the weight of the one that could kill the fund, and re-weighting changes nothing at all.
Twelve managers are scored across eight operational risk domains and the scores are averaged. Three of the twelve carry a flaw that is terminal on its own — no independent custody, an unmanageable conflict, self-marked valuations with no oversight. The averaging model gives all three its top rating.
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Worse than that. The manager with no independent custody of client assets scores 1.500. A manager with no fatal flaw at all scores 2.250. The model does not merely fail to catch the disqualifying issue — it ranks it 0.75 of a point higher.
Every operational due diligence framework carries a warning against averaging your way to comfort. The warning is correct and almost always unquantified, which is a strange thing for a warning about arithmetic. Here is what it is worth in decisions.
| Risk domain | Can it be terminal on its own? |
|---|---|
| Governance | — |
| Structure & terms | — |
| Finance & controls | — |
| Admin, custody, cash | yes |
| Service providers | — |
| Compliance & conflicts | yes |
| Technology & resilience | — |
| Valuation | yes |
Three of the eight domains can be terminal on their own. That is not a controversial claim — most frameworks name the same three. The question is whether the scoring model does anything with the fact, and an average does not: it has no way to express “this one is disqualifying regardless of the rest”.
| Manager | Worst veto domain | Average | Decision on the average | Decision with veto rules |
|---|---|---|---|---|
| Alderman Credit | 5 | 1.500 | Approve | Reject (veto) |
| Brightmoor Partners | 1 | 1.250 | Approve | Approve |
| Caldwell Special Sits | 2 | 2.250 | Approve with conditions | Approve with conditions |
| Draycott Infrastructure | 5 | 1.625 | Approve | Reject (veto) |
| Ellerby Growth | 3 | 3.000 | Approve with conditions | Approve with conditions |
| Fenwick Real Assets | 5 | 1.500 | Approve | Reject (veto) |
| Garrow Mid-Market | 3 | 2.250 | Approve with conditions | Approve with conditions |
| Halstead Ventures | 3 | 3.500 | Not yet | Not yet |
| Inverleith Secondaries | 1 | 1.000 | Approve | Approve |
| Jarrow Opportunistic | 4 | 3.625 | Reject | Not yet (veto) |
| Kelsall Private Credit | 2 | 2.125 | Approve with conditions | Approve with conditions |
| Larkhall Buyout | 4 | 2.250 | Approve with conditions | Not yet (veto) |
Five decisions out of twelve change when the same scores are read with veto rules instead of an average. Three of those five are managers the average approves and the veto rules reject outright. Nothing about the underlying diligence changed; only the arithmetic did.
| Alderman Credit | Caldwell Special Sits | |
|---|---|---|
| Admin, custody, cash | 5 | 2 |
| Every other domain | 1 | 2 or 3 |
| Average | 1.500 | 2.250 |
| Decision on the average | Approve | Approve |
| Which one has a terminal flaw? | this one | neither |
Solve it directly. With n domains, one scored 5 and an approval threshold of 2.0, the others may average up to (2n − 5)/(n − 1) and the fatal flaw still disappears.
| Domains in the rubric | Average the others may carry | Weight of the fatal domain |
|---|---|---|
| 5 | 1.250 | 20.0% |
| 8 | 1.571 | 12.5% |
| 10 | 1.667 | 10.0% |
| 12 | 1.727 | 8.3% |
| 16 | 1.800 | 6.2% |
| 20 | 1.842 | 5.0% |
Read that table twice. At eight domains the other seven need to average 1.571 — not perfection, just good. At sixteen domains they need only 1.800. Refining the rubric made it easier to hide a fatal flaw, by 0.229 of a point, because splitting eight domains into sixteen halves the weight of the one domain that could kill the fund.
Nobody running that exercise would describe it that way. A team that adds granularity is trying to capture nuance and believes it is tightening the model. It is doing the opposite, and the direction of the error is the dangerous one: the more careful the framework looks, the more comfortably a disqualifying issue rides through it.
Weightings are where the argument goes. Should custody carry three times governance? Should valuation be doubled? Two plausible schemes, applied to the same twelve managers.
| Change made to the model | Decisions it changes, out of 12 |
|---|---|
| Re-weight: controls-heavy | 0 |
| Re-weight: governance-heavy | 0 |
| Replace averaging with veto rules | 5 |
Zero decisions out of twelve change under either re-weighting. Five change when averaging is replaced by veto rules. Committee time spent debating weights is time that cannot change an outcome — while the design decision that determines every outcome, whether the model may say “this issue is disqualifying”, is usually taken in one sentence and never revisited.
One more diagnostic worth running on your own rubric. Measure each manager’s distance to the nearest threshold in analyst-points — one notch of disagreement on one domain. It tells you which conclusions survive a reasonable difference of opinion between two people who did the same work.
| Manager | Average | Nearest threshold | Analyst-points to a different answer |
|---|---|---|---|
| Alderman Credit | 1.500 | 2.0 | 4 |
| Brightmoor Partners | 1.250 | 2.0 | 6 |
| Caldwell Special Sits | 2.250 | 2.0 | 2 |
| Draycott Infrastructure | 1.625 | 2.0 | 3 |
| Ellerby Growth | 3.000 | 3.0 | 1 |
| Fenwick Real Assets | 1.500 | 2.0 | 4 |
| Garrow Mid-Market | 2.250 | 2.0 | 2 |
| Halstead Ventures | 3.500 | 3.5 | 1 |
A rating one analyst-point from a different answer is not a rating. It is a coin flip with a decimal place, and it should be reported as such to whoever relies on it.
Three things, none of which requires rebuilding anything. First, name the domains that are terminal on their own and give the model a rule that says so — a veto, not a weight. Second, before adding domains to a rubric, compute what the addition does to the weight of the terminal ones; if the answer is that it dilutes them, add the veto instead of the nuance. Third, publish the analyst-point distance next to every rating, so a committee can see which of its conclusions are robust and which are arithmetic.
The warning against averaging your way to comfort is right. It just needs a number attached before anyone acts on it, and the number is five decisions in twelve.
This article is one calculation from Operational Due Diligence in Private Equity. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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