Map it, don’t Wing it: Why top allocators map their investment process and how to create your own
Scott MacDonald
Podcaster, Advisor and Industry Expert @ Capital Allocators | Investment Management Operations Podcast | Investment Ops Insight Newsletter
If you really know me, you know I enjoy doing direct deals and fund investments. There are a lot of moving parts that quickly come together as the closing date approaches. It’s the closest thing to competitive sports. However, as any allocator will tell you it doesn’t always go smoothly.
A few years ago, I was working on a deal with my private equity team. It was pretty messy. It was not complicated, but there were some loose ends and fund counsel wouldn’t budge on a fund expense provision in the LPA that allowed private jet use. It was also a deal breaker for my billion dollar pension client.
Despite our efforts it eventually got contentious with no progress in sight with the “middle man”. Luckily, I did have some leverage in the form of a very large allocation. Larger dollars create leverage. It works most of the time, but not all of the time.
I changed course and called the managing partner of the Fund to see what we could do. The call took 10 minutes and the deal was done. What I learned was the GP doesn’t even use private jets. The managing partner was a little appalled that he almost lost a large strategic investor over nothing. From then on I learned, “Always separate the legality from the reality.”
Now, back to the closing process. We were down to the final day of a “one and done” close and timing was tight. We got the “final” side letter back and waited for the okay from counsel to send in signature pages. Typical “trust but verify” stuff. Unexpectedly, the changes were not made.
Thankfully we followed our investment process map. You could always find it tacked to my wall on large custom paper. Step 17: Fully signed side letter received before releasing sub doc signature pages.
Don’t worry, it all worked out.
If you are SEC registered, you probably have a policy on your investment procedures. For family offices, it’s less pervasive. According to the UBS Global Family Office Report, only 44% of family offices surveyed document their investment process. Here is my suggestion for taking the leap:
Why Use Investment Process Maps?
In short, mapping your investment procedures brings it to life. I have used investment process maps since my early days launching one the first endowment funds back in 2005.
Having a single document that fully documents any process has the following benefits:
Having a map also forces a few things that are needed in investment management:
The Power of Second Order Effects
The other more subtle benefit is that it surfaces second order effects. These are often less obvious but equally critical to an organization to help eliminate selection bias with managers. A healthy discussion of how one might handle both common and unexpected process points. These might include:
How to Create Your Own Map
To create your own map is a simple process, but it takes time to identify how your team operates. As you will see every organization and asset class has a different operating manual.
Here are the fundamentals on making your own investment process map:
Creating a map will bring rigor to your deal and investment process. Your team members will also understand the method behind the madness. What do you have to lose?
Have a question about mapping your investment process? You can DM me here or email me at [email protected].
Controller at Mellon Foundation
8 个月Process is powerful and the items you highlighted are great points on what should be outlined!
President, Private Equity @ Plocamium Holdings
8 个月This is a great read and exceptional content.