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Is Investment Committee tanking your returns?

A flawed framework dragging down investors

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Transacted
July 02, 2023

Happy Sunday. Let’s get started:

The private equity deal process revolves around Investment Committee (IC), a small group of senior investors that wield final decision-making power over the firm’s most significant investment activities, such as:

  • New platform acquisitions

  • Meaningful add-ons

  • Additional equity injections

  • Dividend recaps or other unique situations

Nearly all managers use some variation of the investment committee framework, though operational specifics vary by firm. Typically, deal teams circulate their proposal in a deck or memo, then head to IC to present live. The committee will either approve the proposal, reject it, or request additional detail for later reevaluation.

Sounds like a reasonable approach to investment governance, but what if it’s actually a terrible way to do things? There are a few critical problems with the status quo:

IC’s fatal flaws…

⁃ The most confident and charismatic member of IC sways the decision (whoever shouts the loudest)

⁃ More reserved and less tenured participants either get shut down or don’t make their argument at all 

⁃ Affirmation or contradiction of investment thesis is as likely to be based on internal politics as the actual merits of the investment, particularly if the outcome is a foregone conclusion thanks to pre-meeting backroom discussions

⁃ Off-the-cuff comments rule the meeting — in a live discussion, there’s no time to formulate detailed thoughts to deliver a robust argument on specific points; the conversation would have long since moved on

Far too often, the dim-witted principal gets an IC approval because they go heli-skiing with the managing partner or are the firm’s best golfer.

That managing partner, with outsize say in a committee’s final decision, is probably the least informed and furthest removed from the detail. They’re prone to steamrolling the meeting with some half-relevant take based on experience from a deal done a decade earlier.

Picture of Vista Equity's Rob Smith fishing

Dust off the hip waders if you want to buddy up to Vista’s Robert Smith

And it’s a near-certainty that much of the discussion will be dedicated to parroting whatever view the managing partner takes — junior IC members love to mirror whoever has the highest likelihood of getting them a promotion.

Meanwhile, the nerd partner (who can’t golf) gets told to pipe down when he warns against the downside risk that ultimately sends the investment to zero.

Best of all, enterprising IC participants will leverage the venue to torpedo their internal competitors’ deals, regardless of their actual opinion of the investment.

One potential solution is to adopt some variation of the Delphi Method:

1. Circulate discussion materials to everyone on IC

2. Collect anonymous, written feedback from each committee member that agrees, rejects, or questions the investment thesis

3. Compile and circulate the anonymous responses to the full committee

4. Committee members consider eachother’s responses, then rethink and revise their position

5. Repeat through a couple rounds, eventually arriving at a consensus viewpoint or a decision via vote 

More effort than the traditional IC process, but probably has a better shot at preventing an investment that blows up your fund.

The best part? You no longer have to spend half a meeting walking the senior partner through a sensitivity table he can’t comprehend.

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🍾 Deals, Deals, Deals | The week's most interesting transactions

1. AI dealmaking is getting hot, heavy, and extremely pricey.

This week, Databricks announced a $1.3 billion acquisition of MosaicML, an OpenAI competitor backed by Lux, Frontline, DCVC, and Samsung Ventures, among others.

At the same time, chatbot business Inflection AI secured a $1.3 billion raise, with backers Nvidia, Microsoft, Eric Schmidt, Reid Hoffman, and Bill Gates coming in at a $4 billion valuation. It’s the year’s largest U.S. venture round and underlines how expensive it can be to build generative AI models.

Plus…

⁃ Thomson Reuters nabbed AI legal assistant Casetext in a $650 million deal.

⁃ Celestial AI, developing an optical computation framework, raised a $100 million Series B from IAG Capital, Koch, and Temasek.

⁃ Typeface, an enterprise-focused generative AI startup, raised a $100 million Series B at a $1 billion valuation from backers Salesforce, Lightspeed, Madrona, GV, Menlo Ventures, and M12.

2. Elon Musk is either confused again or prepping for a Starlink IPO.

Earlier this week, Musk told Bloomberg reporters that it "would not be legal for me to speculate about a Starlink IPO," SpaceX’s satellite internet business.

Musk might be overly cautious after previous run-ins with the SEC, but it’s typically only illegal to discuss the matter should Starlink have already confidentially filed for an IPO.

This week’s other big IPO rumor: Shein publicly denied a Reuters report that it had confidentially filed for a U.S. IPO. Last valued in a private round at $66 billion, the fashion retailer is at least keeping itself busy showing the world that it definitely doesn’t use child labor.

3. RedBird Capital Partners maintains its title as most hype private equity firm.

The group completed a $200 million investment in Renault’s Alpine Formula 1 team, taking a 24% stake in the racing business and slotting in alongside existing backer Ryan Reynolds (via his Maximum Effort Investments).

The investment joins RedBird’s existing portfolio of stakes in AC Milan, Fenway Sports Group (Liverpool & Boston Red Sox), the XFL, and NFL Hospitality.

4. TuSimple announced it’s evaluating a potential sale of its U.S. business after having self-driven itself off a cliff.

The San Diego-based self-driving trucks manufacturer is facing a sticky situation just two years after bagging a $1.4 billion IPO (at an $8.5 billion market cap).

Shares are down 96% from their peak following delayed quarterly financials and delistment warning, with Perella Weinberg brought in to figure things out (or prep for a bankruptcy process).

5. KKR makes the latest move in a bidding war with Arcline over flow controls manufacturer Circor.

KKR’s sweetened $56 per share offer closes the gap to Arcline’s $57 bid, which is potentially less attractive given antitrust concerns with Arcline PortCo Fairbanks Morse Defense.

The two firms have been going back and forth since Circor previously agreed to KKR’s original $49 offer. PE has historically avoided public bidding wars, but Arcline’s attempt to snatch KKR’s deal is the latest example of a practice that’s becoming increasingly common.

This week’s other big dog deals…

⁃ Monster Beverage is nearing a deal to buy rival Bang Energy out of bankruptcy for $362 million.

Picture of Jack Owoc

Former Bang CEO Jack Owoc: a shocking outcome for a business led by top executive talent

⁃ Canadian miner Kinross Gold, trading at a C$7.5 billion market cap, rejected an unsolicited takeover offer from competitor Endeavor Mining.

⁃ Home health and hospice business Amedisys agreed to an improved $3.3 billion cash offer from UnitedHealth’s Optum unit, ditching a previously agreed $3.6 billion all-stock deal with Option Care.

⁃ Saudi Arabia’s Public Investment Fund is looking to move from golf (LIV) to tennis, reportedly holding preliminary talks with The ATP Tour over a potential joint venture. CVC is also interested, having previously invested in the top women’s competition.

⁃ Authentic Brands Group has raised $500 million at a $20 billion valuation from existing investor General Atlantic.

⁃ TSG Consumer Partners is reportedly shopping portfolio company Backcountry, the ski brand with annual revenue of roughly $1 billion.

⁃ Brookfield submitted an offer to buy American Equity Investment Life for nearly $4.3 billion, a 35% premium to prior closing price.

⁃ Francisco Partners and Vista Equity Partners are leading the group of bidders vying for a take-private of investment management SaaS developer Enfusion, trading at a $700 million market cap.

⁃ Blackstone is readying an exit of half its stake in Las Vegas’ Bellagio Hotel, purchased in 2019 for $4.3 billion.

⁃ Gojo Industries’ sale process fell flat, with the Purell hand sanitizer manufacturer failing to meet its $2 billion+ reserve price following lukewarm interest from bidders Kimberly-Clark, Essity, Ecolab, and SC Johnson.

⁃ Group Black is negotiating a potential deal for Arena Group, the publisher of Sports Illustrated, TheStreet, and Men’s Journal.

⁃ Japan Investment Corp. reached an agreement to acquire chip materials supplier JSR for $6.3 billion.

⁃ T.H. Lee handed William Blair the sell-side mandate for Nextech Systems, its EMR and practice management software provider that could be worth up to $1.5 billion.

⁃ Prologis has agreed to acquire a portfolio of 14 million square feet of industrial real estate from Blackstone for $3.1 billion.

⁃ Visa agreed to buy Pismo, a Brazil-based fintech startup backed by Accel, Amazon, and SoftBank, for $1 billion.

💰 Fundraising | The firms stacking it up across buyout, growth, and venture

⁃ Varsity Healthcare Partners raised a $700 million fourth fund

⁃ KLH Capital Partners raised $400 million for a fifth fund

⁃ Arboretum Ventures raised $268 million for a sixth healthcare-focused fund

⁃ Cathay Capital raised $270 million for a fourth lower middle market buyout fund

⁃ Kindred Ventures raised a $200 million third flagship fund and a $110 million inaugural special situations fund

⁃ Pronghorn raised a $200 million fund focused on investments in Black-owned spirits brands

⁃ Uncork Capital raised a $200 million seed-stage fund, alongside a $200 million special situations fund

⁃ Offline Ventures is raising up to $100 million for its second fund

⁃ TechStars is raising up to $150 million for its next accelerator fund

📜 Bullpen Reading Roundup | Get quick with the ALT + Tab

1. Dinky little add-on deals are now the hot new strategy for private equity.

This year’s overall PE deal value has crashed, but deals volume has barely changed. The WSJ says rising rates, disjointed markets, and economic uncertainty are driving a hunt for smaller transactions (and abandonment of mega-buyouts).

You hate to hear it if you’re a PE investor — small deals take as much (or more) effort as the big ones, and it’s going to take a lot of them to deploy any meaningful amount of capital. (Check it out: WSJ) 

2. We’ve come a long way since the days of Bernie Madoff…

Fabricated fund returns aren’t even interesting anymore — in 2022, we building Ponzi schemes with a stockpile of Jordans and a Footlocker plug.

Take a look at Businessweek’s deep dive on sneaker resale empire Zadeh Kicks and founder Michael Malekzadeh’s arrest on charges of money laundering and wire fraud. (Check it out: BBG)

3. Nothing beats a good insider trading case, particularly when it involves an already floundering SPAC.

The feds arrested three men on insider trading charges this week after they pocketed $22 million from advance news that SPAC Digital World Acquisition Corp. was merging with Trump’s upstart Truth Social.

It’s yet another hurdle for a deal already facing a litigious downfall over public discussion of the potential transaction prior to announcement. (Check it out: Axios)

4. Tech execs have a new playbook for managing Washington.

Starting with Sam Bankman-Fried, tech bros have increasingly seen the benefit of cozying up to D.C. policymakers and regulators. His run in the Capitol didn’t last long, but Sam Altman and the AI crew took notes.

This week’s Semafor takes a look at Scale AI founder Alexandr Wang. The 26-year-old has ragged on China and convinced House Reps he’s their bestie — in return, he’s locked up some fat government contracts. (Check it out: Semafor)

Thanks for reading, catch you guys next week. Drop a line with any feedback or scoops (just reply here; kept anonymous).

— Sam