Game Film vs. Scoreboard

Too often, fund level performance is the first, and sometimes only thing that LPs look at when analyzing a fund. But this is only the scoreboard that tells you the outcome. Quoting an old podcast from someone I greatly respect, CIO and industry veteran Muthu Muthiah, ‘performance is an outcome of an apt investment philosophy, operationalized by a rigorous process, run by aligned people.’

‘Performance is an outcome of an apt investment philosophy, operationalized by a rigorous process, run by aligned people.’

I’ve talked about the 4 P’s and this really brings it home. People, process and philosophy are the leading indicators of performance, and since as I’ve written before, it takes half a decade or more for performance to really crystallize, this is by far the superior way to underwrite investments.

This is why I say instead of just looking at the scoreboard, watch the game film. Generating a massive outcome is very possible to do by just pure luck. But is it sustainable, is it durable, is it repeatable? Figure out what steps were taken to generate that outcome. Taking Muthu’s quote one step further, it’s always about the who, how and why.

Even with a Fund 10 or 15, understanding the people who will be responsible for the present and the future of the firm and how the strategy will be applied going forward is most critical. Remember, as blind pool investors, we are investing in the future, not the past. The track record and fund level returns provide a backdrop for the history, and can give us the basis for questions, but it should NEVER be the only reason to invest in a fund.

Worse yet, in emerging manager world, when track record is limited or difficult to ascertain, target returns might be what some LPs anchor to. I had a conversation yesterday at the US Emerging Manager Institute (US EMI) Summit, after my panel on ‘the mindset of LPs’, that struck a chord. One GP said ‘if I don’t say that I am targeting a 5x or more in my deck, LPs won’t read it because other people are saying it and they will want to talk to them before me’. While I hope this isn’t true for most LPs, the fact that even some people would use that number (which is impossible to project with any certainty) as a guide of whether to take a meeting or not makes me cringe. And as much as it does make me cringe, I said that LP is probably not the one for you anyway.

In any blind pool asset class, anchoring to past performance may make decisions seem easy, but in reality, it’s missing the whole point. To be a good investor, you need to understand HOW performance is generated rather than just blindly investing based on past outcomes.

#themoreyouknow #emergingmanagers #fundraising #trackrecord