When a Thesis Gets in the Way of Risk

When investment managers raise funds, they usually do so with a thesis. Very few investors can raise capital because LPs just “trust them to do what is best.”

But what happens when a thesis needs to change mid-investment period? There aren’t a lot of good options. An investor can either:

  • Send money back to investors, at which point the LPs assume the whole strategy failed and something is wrong at the firm. Even if the initial investments made were okay.
  • Pivot theses — but this takes a lot of buy-in from LPs. Usually, something in the fund documents would need to change for this to happen.
  • Keep investing through it all, hoping the world will come back to where it was.

Investment theses might change for all kinds of reasons:

  • Too much capital came into a space
  • Some change in technology
  • A global pandemic
  • etc

Recently, a global pandemic occurred, which might change which investment theses work, and which ones don’t work. The ones that OBVIOUSLY don’t work anymore, are easy decisions. You send the money back. The ones that continue to work are easy — you keep going.

The ones that are a little worse, and ought to pivot — are in a tricky situation. I wonder what percent of investment managers are capable of being able to adjust something they said they wouldn’t do, but now are starting to do, with the support of their investors.

I wonder which investors are letting the optics of their actions override a prioritization of risk.

[5'9", ~170 lbs, male, New York, NY]. I blog about investing. And usually about things I’ve learned the hard way. Opinions are my own, not CoVenture’s

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