What You Can Learn From The Investment Committee Process
Level 2 - Value Investor
Welcome Avatar! Today we’ll talk about the investment process at asset management funds (specifically private equity) and give you insight on how large investments are made behind the scenes.
As funds grow in size with new investment verticals, tens or hundreds of investment professionals and a wide array of strategies, they develop an institutionalized process for evaluating, recommending and executing investments. The investment committee (“IC”) is responsible for overseeing this process and has the authority to approve and reject investments.
Despite their scale, individual investors benefit from one thing institutions just don’t have: speed.
In today’s article we’ll discuss what lessons we can take from an institutional investment process to improve our own system for investing.
The IC
IC typically consists of the most senior investment staff at the fund and may also include some non-investment professionals (e.g. head of risk management). The exact composition and size of an IC will vary from fund to fund. A small fund may have an informal process with 1 or 2 people approving investments whereas larger funds may have 5-10 people with various roles and responsibilities across different strategies. Since investments impact the bottom line of Partners the most, you’ll usually find them on the IC.
A “deal team” presents the investment thesis to IC.
A deal team typically consists of at least a Partner or Managing Director (senior investment professional), a Principal or VP (mid-level investment professional) and an Associate / Sr. Associate (junior investment professional).
The deal team’s job is to manage the entire investment process from beginning to end, including all aspects of due diligence, negotiating legal documents, building financial models and putting together investment memorandums (long af writeups) to present to the IC and convince them to invest.
Below is an excellent diagram I found online of the process (first rule of fihnance - don’t reinvent the wheel).
Depending on the fund, you will go to IC 2-3+ times throughout the investment process to present new findings, answer additional questions as they arise and do more due diligence.
Since private equity investors typically buyout the entire company when they invest, they do a ton of work upfront because they have to make a very significant capital commitment and then live with that investment for 3-5+ years. In contrast, hedge funds typically have a more condensed timeline to research and invest because their investments are liquid, meaning they can be sold anytime on the open market.
Venture capital funds are somewhere in between, where they are making private market investments but with smaller capital commitments per investment (some might call it spray and pray). The VC IC process varies widely depending on the market.
The general idea across private equity, hedge funds and VC is the same - a deal arrives at your desk, you evaluate whether or not it’s worth looking into and if it is, you’ll speak to the management team or their advisors and dig in. You research and diligence the investment, present it to your IC and they decide whether or not to invest. You’ll then be tasked with monitoring the investment and providing any material updates. Eventually, you will go back to IC to get approval to exit the investment.
So how is that relevant to you?
These funds have capital, resources, institutional knowledge and teams of people working on these investments. Furthermore, they have access to investment opportunities that the average person simply cannot get. So why is this relevant?
Well, we can breakdown the investment process institutions use to steward tens of billions of dollars and improve the way we approach our own investments.
Key lessons:
Document your investment process: don’t worry if it is very basic right now (see tweet —> ape), write down what you have been doing and then add more dimensions to the process. Items to consider:
Read the “Documentation” section of their website
What service does the protocol provide?
What are the tokenomics and how does the token accrue value?
Research the founder(s) and core team
Think through possible downside risks (how can you get rekt?)
If you want to go in-depth, you can review our deep dives for a structured way to approach investments
Adjust for speed: Depending on time horizon, scale of investment, and simply how much time you have, you should adjust your process for how much diligence/research you can do.
In slow markets, you can really dig in. In hot markets, you may need to get comfortable investing with more unknowns due to limited time
Slow markets are the best time to build up your research skills because you’ll learn what to focus on and can act quickly when markets are hot
Build your own IC: Have a group of 3-5 friends you can bounce your investment ideas off of and make sure they actually help you think critically. Meaning, you should asking each other questions and thinking through all the different possible risks and rewards. The IC’s duty is to sink their teeth into the investment and evaluate it, not serve as a “check the box” discussion panel.
Monitor your investments: This is where a lot of people get lazy in crypto. They’ll invest in something and then expect things to go to plan. If they don’t go to plan they’ll hold their investment all the way down. Be strict with your investments - if they’re underperforming significantly you need to figure out why and then decide if it’s solvable.
Exit: This is the most challenging part. You will sell things early instead of holding for life changing gains. You will sell things that are failing, far too late. This is part of the process. Embrace that knowing what to buy, when to buy it and when to sell it (if at all) is a constant learning process. The nice thing about DeFi is that your losses are often made up by making multiples on your winners - similar to a VC approach to investing.
Being a solo investor rather than working at an institution lets you be nimble in ways institutions will never be. The key is to implement a process to make sure you are putting your investments through proper vetting.
Over time, you get better at quickly making assessments on what to ape vs. pass on. You’ll still probably get rugged on occasion but hopefully a lot less, with improved position sizing.
What’s your investment process? Let us know in the comments below.
This is a free article. We are a niche research publication building an in-depth fundamental analysis and educational platform to give crypto users and investors better odds against VC Funds, influencers and whales that control the market. We teach you to think like them.
Our publication relies purely on content quality and word of mouth to grow so we would appreciate if you could give this article a share.
In our paid substack, we dive deep into protocols and tokenomics as well as provide broader market commentary. Thousands of readers trust us for our analysis. No frills no shills.
Join our community below.
Until next time..
Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.
As someone w/o a finance background, this type of post is very helpful.
Thank you DeFi team for those "behind the scenes" articles, it helps a lot