Conventional wisdom says that funds shouldn’t grow, because growth of fund size is the leading cause of worse returns. But we propose another reason beyond obvious economic gains with larger AUMs - growth opportunities for native talent.
Like everything, it depends a lot on how you grow and what is it you are set to accomplish as a firm for your LPs.
What usually happens is that you start off in some niche you dominate from the start and where you build a track record that allows you to build from. When you have a good track record and start to gather attention, more investors will want in and you’ll face a version of the innovator’s dilemma:
1) grow into areas you do not have the certainty of executing as well, cannibalizing what you dominate
2) stay within your lane, forgoing growth and assuming rotation within the lower ranks
There’s obviously a lot of nuance in between these two extremes.
Many LPs want the firm to remain focused in milking what it’s best at. That may be appropriate for some but that’s shortsighted, and more risky than most LPs acknowledge. No firm will succeed without adapting to the only certainty in the investment world: change. People’s circumstances and motivations change, life gets in the way, the investment and competitive environment changes, etc. I have seen the best laid out succession plans go to hell, and firms imploding because they failed to move on from something that used to work but no longer does.
There will always be tension between what LPs and GPs want. The best you can strive for is to partner with firms that truly put investors first, and as a firm to create and maintain a culture where the client comes first.
Like everything, it depends a lot on how you grow and what is it you are set to accomplish as a firm for your LPs.
What usually happens is that you start off in some niche you dominate from the start and where you build a track record that allows you to build from. When you have a good track record and start to gather attention, more investors will want in and you’ll face a version of the innovator’s dilemma:
1) grow into areas you do not have the certainty of executing as well, cannibalizing what you dominate
2) stay within your lane, forgoing growth and assuming rotation within the lower ranks
There’s obviously a lot of nuance in between these two extremes.
Many LPs want the firm to remain focused in milking what it’s best at. That may be appropriate for some but that’s shortsighted, and more risky than most LPs acknowledge. No firm will succeed without adapting to the only certainty in the investment world: change. People’s circumstances and motivations change, life gets in the way, the investment and competitive environment changes, etc. I have seen the best laid out succession plans go to hell, and firms imploding because they failed to move on from something that used to work but no longer does.
There will always be tension between what LPs and GPs want. The best you can strive for is to partner with firms that truly put investors first, and as a firm to create and maintain a culture where the client comes first.