It’s Important to Do Deals on an “Absolute Basis” — Not on a “Relative Basis” — And Writing Checks Happens in Fits and Stops (Not Once Per Quarter)

The last 6 weeks have been some of the most exciting of my career. We have seen more high-quality deals in these last few weeks than any other similar stretch of time that I can remember.

In 2018 we didn’t do many deals. Maybe 6 venture deals, and 2 new credit deals. We made no equity investments in any crypto companies (though we did do~$50M of crypto-related SPV’s for trades we thought we could get into, and then out of in the medium-term. Which we did).

But this year has been different. And in an exciting way. We’ve already invested in the equity of two crypto companies, and we have term sheets out to three credit deals.

It reminds me that investing should be done on an absolute basis, and not on a relative basis.

Don’t Do Deals Just Because You Haven’t Done One in a While

It seems obvious to not do deals if they don’t hit a certain bar/threshold. But that’s hard for a lot of managers (especially new managers) to do.

It’s tempting to do “the best deal of the month” or “the best deal of the quarter because:

• If you hold onto cash, or don’t call capital quickly enough, your LP’s will get mad that you are creating cash drag.
• You can’t raise your second fund until you deploy your first
• The earlier you do deals, the earlier performance feedback starts to happen
• Not doing deals makes it harder to get future deal flow (people stop sending stuff if you always say “no”).

Beyond the reasons above, it’s comfortable to do deals on a semi-periodic basis. We, as people, like patterns. And doing: “1 out of 100 deals” or “4 deals per year” feels selective. It feels right.

But it couldn’t be more wrong. It’s the number one reason, in my opinion, that people dip in their standards.

But When Times Are Good, Pull The Trigger!

But when the deal flow is good… pull the damn trigger! Double down! If you see 4 deals in a month that are all good/that all hit your absolute bar, DO ALL OF THEM.

Otherwise, in 6 months, when things are slow again, you’ll be doing your “one deal per quarter” and it won’t be as good at the 4th best deal you saw back in February.

Some investors are good at not pulling the trigger when they don’t see anything good, but very few are good at pulling the trigger multiple times in a week if they happen to see two deals within really close time proximity.

It’s scary, and it creates self-doubt.

-“Am I just being desperate because it’s been a while since I did a deal?”

-“Am I not doing my 1 out of 100 deals?” (or whatever your target number is)

-Your LP’s will start to call and wonder why you’re being reckless.

Damn them all. If the deal is good, pull the trigger!

This takes confidence, and it also takes having been investing for some time to get this right. If you’re a new manager, you won’t have seen enough “B’s” yet, to be confident when you see an “A.”

But the best way to make sure you do this right is to establish your deal box early. And know what “gets you there” ahead of time.

For example, for us, we look for:

-2x loss coverage ratios

-15%+ yields

-Short duration loans

-Fully amortizing loans

-Loans not correlated to the traditional lending markets

etc.

For more on our deal criteria, you can find out we look at credit deals, here, for example.

But investing should be done on an absolute basis. When a deal clears your bar. Not just because it’s the best deal in the cohort you’re looking at.