Map it, don’t Wing it: Why top allocators map their investment process and how to create your own

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:

• It visualizes all steps in the process
• It defines expectations, ownership and relationships with different stakeholders
• It incorporates timelines and factors with common bottlenecks

Having a map also forces a few things that are needed in investment management:

• Discipline, details and the consistent application of “best in class investing”.
• It serves as an education/training tool for team members and senior management
• It shows your clients that you are professional-grade investors.

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 do we handle issues that arise from background checks? These moral and ethical questions will help articulate in advance your committee’s position with murky areas. Real life examples include multiple misdemeanors by a CEO, a private fund GP sued for fraud by his brother or if how a fund manager reported graduating magna cum laude but it was really only summa cum laude. Sorting out these moments in advance can help with efficient committee decision making.
• What should the legal team focus on with the LPA review? What does the investment team care about? What are your unique deal breakers for “off-market” terms?
• How/when do we “socialize” an upcoming investment decision to the investment committee before voting?
• How does operational due diligence fit into your investment diligence? What will kill a deal? Can your Head of ODD veto a deal? (Hint: They should if you have a good framework.)

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:

1. Make a step by step list of what your firm does today; starting from manager identification to funding.
2. Get a good online flowchart maker tool. There are many. My friend and former podcast guest, Stephanie Withers, CPA loves Lucidchart . Microsoft Visio works too.
3. Create ownership “swim lanes”: Identify key stakeholders/owners on each step and get input from these people. You may be surprised about the granularity here.
4. Identify things that are time bottlenecks (e.g. legal/tax review, background checks.)
5. Adjust workflows and add new information from steps 3 and 4.
6. Go deep: Once you think you are done, ask what is missing: for example, does the investment confirmation amount and share class match the sub docs? Does certain information need to be logged in your RMS/OMS/PMS? Are there dates with fee step-downs that need to be calendared? The number of loose ends will surprise you and a third party error can have huge implications to fees and liquidity.
7. New Map=New Destination: Make different maps for each asset class such as marketables, private equity, private credit, hedge funds etc.
8. Money in, Money out. For liquid strategies how do you redeem money? Is an audit holdback? How long will that actually take and will that pay interest?

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].