Happy Thursday and welcome.

Over the past few weeks, I've written about reading track records and understanding what GPs actually build in their companies.

That work depends on being able to change your mind about a manager. I thought this was the perfect piece to revisit.

I wrote it in January, about a decision we made almost ten years ago. It's as relevant today as ever.

When someone spends weeks on a manager, flies across the world for diligence, then recommends against investing, how does the organisation react?

The answer says a lot about whether the process gives people room to change their minds.

Enjoy the read,

Steffen

Years ago, I was on the US West Coast for an on-site due diligence meeting. A nine-hour time difference, significant travel, the kind of commitment that signals you're taking a manager seriously.

We had our six-hour session. It went fine, but a few things stood out. As our three-person diligence team sat together the next morning, we all reached the same conclusion. We weren't going to present this as an investment recommendation.

That could have been the end of the story.

My superior at the time said something that caught me off guard:

"I still think it was the right decision to go. I hope you're not disappointed by the outcome."

I wasn't disappointed. To me, this was simply how the process was supposed to work.

This was my manager relationship. I'd sourced it, built it and taken it through preliminary screens. We'd spent significant time and money getting to this point. The on-site gave us enough information to decide against investing.

I wouldn't have changed anything about the process.

It took me years, and exposure to more political organisations, to understand why he had felt the need to say it.

In many organisations, turning down a fund you brought to the table is seen as a personal failure. Especially after this much effort. The implication is that you either had poor judgement upfront or aren't fighting hard enough for "your" investment.

That creates a problem. The person who knows the manager best also has the most personal credibility tied up in getting the investment approved.

Every meeting adds to it. Colleagues have spent time reviewing the case. The investment committee knows the manager's name. You've explained why the opportunity deserves attention.

Changing your mind now means explaining why.

If that explanation is treated as an admission of failure, people have a reason to keep defending the case long after their own conviction has weakened.

You could call my initial surprise naivety. You'd probably be right. I prefer to call it the benefit of working in the right culture.

At the firms I've worked at, investment decisions were made by the team. Starting diligence required team agreement. Investment approvals required consensus. Having responsibility for a manager relationship didn't create an obligation to get the fund approved.

That mattered when we came back from a trip with a recommendation to pass. We could discuss what we'd learned without someone needing to defend the travel budget or protect their reputation.

The money already spent could tell us something about the efficiency of our process. It couldn't make the investment more attractive.

Of course, if a team repeatedly flies across the world to discover problems it could have identified in the first meeting, it should improve its screening. Walking away doesn't automatically prove the process was good.

But an on-site should be capable of revealing something that changes the answer. Otherwise, why go?

I've been fortunate to work in organisations where I could recommend a no after significant diligence. Through conversations with other LPs and GPs, I know that freedom isn't universal.

A useful test is what happens when someone changes their recommendation late in the process. Do colleagues examine the new evidence? Or does the discussion centre on why that person took everyone this far?

There should be room for both questions. But if defending the work already done becomes the priority, the investment decision suffers.

Diligence where you can never change your mind is just confirmation bias with an expensive plane ticket.

Sometimes, the most disciplined outcome of a long, expensive diligence process is to walk away.

This newsletter is written by Steffen Risager, the founder of FundFrame, a platform for LPs to manage their private markets investments.

Before that, Steffen was CIO at Advantage Investment Partners, a Danish Fund-of-Funds.

Steffen has a decade of experience as an LP, and has made commitments totalling approx. $6bn across fund- and co-investments.