The LP-driven mandate: Operational excellence is now an investor requirement

For years, operational excellence was treated as an internal exercise. It was the COO's responsibility to keep the engine running, the general counsel's job to manage risk, and the compliance team's role to tick the right boxes and avoid regulatory missteps. It was about staying out of trouble and managing costs quietly in the background.

That story has changed.

Today, limited partners (LP) are not just evaluating investment performance. They are scrutinizing how funds are run—looking closely at the systems, processes, and controls that underpin every deal and every report. According to a recent survey of 150 LPs globally, 85% report that poor fund administration quality has negatively impacted future investment decisions in the past year, and 68% now rank operational transparency above historical performance when assessing managers. A further 64% require documented, tested cybersecurity protocols before committing capital.

Regulation is intensifying, but it is no longer the defining pressure.

In Europe, regulators are consolidating requirements and oversight. And, while in the U.S. the Financial Crimes Enforcement Network's (FinCEN's) final rule has been delayed, by 2028, 21,699 SEC-registered and exempt-reporting advisers will be required to have comprehensive anti-money laundering (AML) programs and carry out suspicious activity reporting.

But LPs are not waiting. They are applying these standards today no matter the jurisdiction, and for firms seeking capital, operational discipline has become a competitive differentiator.

What LPs want to see

Operational due diligence (ODD) has become a decisive moment in fundraising. Research shows that LPs are not just reviewing compliance frameworks—they are using ODD findings to shape deal terms and, in some cases, to walk away entirely. A Private Funds CFO survey reinforces the point: close to two-thirds of general partners (GP) surveyed said that LPs were conducting more due diligence on middle and back office functions, and 89% said that LP's questions of back-office functions are very or somewhat detailed on compliance. On the LP side, about 65% said that AML and know your customer (KYC) policies are a must-have.

At the same time, investors are demanding more transparency in how information is shared. In Asia-Pacific (APAC), 42% of LPs prefer customized reports, while 37% of Europe, Middle East, and Africa (EMEA) investors prioritize dashboard-style reporting. Generic reporting is no longer enough. LPs want data in real time, tailored to their needs, and backed by documented compliance evidence.

The cost problem

This shift in expectations is happening against a challenging financial backdrop. Private equity is sitting on more than $2.184 trillion in dry powder as of March 2025, even as exits slow and competition for deals intensifies. Fundraising is under strain too, as 2025 marked the weakest year for U.S. private equity capital formation since 2020, with 327 funds achieving final closes worth $277.9 billion—a significant decline from the $381.6 billion across 668 funds in 2024. Managers are under pressure to do more with less, delivering the same—or more—without expanding cost bases.

Traditional legal and compliance delivery models make that difficult. U.S. law firm billing rates rose 6.5% in 2024 and accelerated to 7.4% through mid-2025. U.S. rates have now risen 122% since 2006, consistently outpacing inflation by more than double. In the UK, the top 10 firms raised hourly rates by nearly 40% from 2019 to 2024. For high-volume, repeatable tasks like non-disclosure agreements (NDA), engagement letters, or transaction-level KYC, that level of spend is increasingly hard to justify.

A better way forward

The firms adapting fastest are rejecting the false choice between speed and quality. They are adopting models that combine specialist human expertise with AI-powered workflows, delivering premium outcomes more quickly, with fewer errors, and at a fraction of the cost. Organizations embedding next-generation operational excellence see productivity gains of more than 25% in year one, with a further 15% possible in year two—all without increasing costs.

In practice, that means being able to:

• Turn NDAs around in hours rather than days, without compromising on precision

• Run transaction-level KYC with the same rigor and documentation LPs expect from a regulator, but faster and more cost-effectively, with real-time dashboards, tracking, and audit trails

• Manage LP transfers at scale, even as volumes spike, without spiraling external legal bills

These are becoming the minimum price of admission to capital.

The bottom line

Operational excellence has shifted from internal ambition to external requirement. LPs are clear about what they want: faster deal execution, lower costs, transparent reporting, and documented compliance. They are prepared to walk away from managers who cannot deliver it.

The firms that respond will not just stay compliant. They will win trust, attract capital, and prove to investors that they can deliver returns without compromise. In other words, they will stop choosing between quality and speed. They will demonstrate both, consistently and at a lower cost.

And in 2026, that is the standard that investors are already demanding.

This is the first entry in Carta Law's series, Private Markets Compliance: The Operational Framework. Read the next entry here.

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