An Investment Policy Isn't Just for Your LPs
One of the more interesting contrasts I've noticed in wealth management is how differently institutional investors and individuals approach managing their capital.
Think about your limited partners: endowments, pension funds, foundations, and other sophisticated institutional investors.
These institutions generally have a target allocation to private equity as part of their broader investment portfolio. When considering a commitment to a new fund, they're not just evaluating the investment opportunity. They're also evaluating how that commitment fits within their overall investment plan.
In today's challenging fundraising environment, you may have encountered LPs who are stuck between a rock and a hard place. They like your strategy and would welcome the opportunity to commit additional capital, but distributions from their existing investments have been slower than anticipated, leaving DPI below expectations.
With fewer distributions coming back, they may find themselves overallocated to private equity relative to their target allocation. Even if they want to invest in your next fund, their investment policy may prevent them from doing so.
Those limitations aren't arbitrary. They're often established through an Investment Policy Statement (IPS), which defines the objectives, constraints, risk parameters, and investment guidelines that govern how the institution allocates its capital.
One of my favorite investing books is Organizational Alpha by Ben Carlson. One of the lessons I've taken from the book is that successful investing isn't always about finding better investments. Sometimes, having better policies and decision-making processes can be just as valuable.
Yet it's not uncommon for an individual or family with significant assets to have no comparable framework governing their personal wealth.
They might have a collection of investment accounts, private fund commitments, concentrated positions, real estate, and relationships with multiple financial institutions. Individual investment decisions may be perfectly reasonable, but there's no overarching document connecting those decisions to what they're actually trying to accomplish.
But a portfolio isn't an investment policy. It tells you what you own. An IPS should explain why you own it, what you're trying to accomplish, and how you'll make decisions along the way.
An Investment Policy Statement doesn't need to address every aspect of someone's financial life. But it shouldn't be developed in isolation from the rest of their balance sheet, either.
For private equity professionals, that means considering questions that extend beyond the investments in a brokerage account:
How much liquidity should you maintain relative to future spending needs and fund commitments?
How should your exposure to private investments influence the composition of your public portfolio?
Under what circumstances should you rebalance, raise liquidity, or reconsider an investment?
These questions become particularly important when your balance sheet includes assets that can't easily be sold or valued with precision. An investment policy should reflect those realities, even if the broader financial plan is where many of those decisions are made.
Perhaps the most important benefit of an Investment Policy Statement isn't what it tells you to do today. It's how it helps you make decisions tomorrow.
Markets decline. Capital calls arrive unexpectedly. A friend asks you to invest in their business. Personal spending needs change. Without a guiding framework, each decision risks becoming an isolated exercise.
Of course, an IPS shouldn't be so rigid that it prevents you from adapting to changing circumstances. I've learned over time that it's much easier to adjust a documented plan than to start from scratch every time life throws you a curveball.
Your LPs may pass on an attractive investment opportunity simply because it doesn't fit within their broader investment policy.
At a certain level of wealth and complexity, having a clearly defined investment policy becomes increasingly valuable. It doesn't eliminate difficult decisions, but it gives you a framework for making them.
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