Happy Thursday and welcome to another edition of Beyond TVPI.

First off, thanks for all the well-wishes I received on the back of the last post. Happy to report, that me and my wife are feeling better again.

In 2018, I made the largest fund commitment I had made at my employer.

It was to Audax, a manager we had already underwritten twice.

There was not much left for us to discover at the surface. We knew many of the managing partners. We understood the buy-and-build strategy and the investment process. We had years of experience with the firm.

Yet it was probably the deepest diligence we ever did.

Knowing the manager did not remove the work. It allowed us to spend less time learning the basics and much more time testing how the machine worked.

With another manager, familiarity almost led us in the wrong direction. We knew the team, liked the relationship and expected to re-up. Only when we examined the valuations across the portfolio did the case begin to fall apart. We passed.

The same familiarity sat behind both decisions. With Audax, it let us go deeper and supported our largest commitment. With the other manager, it had created comfort that the evidence no longer supported.

This week, I look at what should change when an LP underwrites the same manager again, and why the prior work should raise the quality of the next decision.

Enjoy the read,

Steffen

By 2018, Audax hardly needed an introduction.

It was the third time we had underwritten the firm's buyout strategy. We knew many of the managing partners, sat on the LPAC, etc. We understood the buy-and-build model, how the team was organised and how the firm approached value creation.

We of course did all our usual work.

However, another presentation on the strategy would not have taught us much. Neither would another tour through the senior team's biographies or a fresh explanation of why buy-and-build can create value.

That work had already been done.

So we went somewhere else.

Audax as a firm is unusually process-heavy (which, if you've read this newsletter, you're probably not surprised to learn that I love this - probably also to the point that it's a bias of mine). That made the firm easier to examine in detail.

I have previously used Audax as an example of a manager whose model spreads risk across a large number of investments. The question was whether that model could keep working as the firm grew.

We spent time on its sourcing operation and the huge data operation behind it.

The interesting question was no longer whether Audax had a large sourcing organisation. We wanted to understand how the organisation worked at scale and how the firm used the information it collected.

Even today, what Audax did with this information would impress me.

We also met the operational value-creation team. The buy-and-build model depended on more than finding platform companies and adding acquisitions. It required a team that could support a large number of businesses and apply a repeatable process across them.

There were no great surprises. Only additional comfort.

Diligence is sometimes treated as a search for the hidden flaw. But when you already know a manager well, the work can be valuable because it confirms that the process is as deep as you believed and still works at the scale being proposed.

In this case, the closer we looked, the more comfortable we became.

The commitment became the largest I made at that employer.

That did not reflect a view that nothing could go wrong. It reflected how we thought about the risk underneath the fund.

Audax had a wide team and typically made around 30 investments per fund. Each underlying investment was smaller than the individual positions in most other funds we considered.

We were not relying on one dealmaker or a handful of companies to carry the outcome. The breadth of the organisation and the number of investments reduced the importance of any single person or deal.

The diligence supported that view. We had looked closely at the processes that had to work across all those investments. We had met the people responsible for operational value creation. We had examined a sourcing system built to supply a large and repeatable investment programme.

Already having made two Audax commitments, and now making our largest commitment to date, we of course took some GP concentration risk - but we were happy to accept this risk.

I have seen the same dynamic produce the opposite result.

I previously wrote about a re-up where we knew the manager well and wanted to invest. The relationship was good. The track record looked strong. There were no obvious red flags.

Familiarity had created a presumption that we would re-up.

Then we compared the entry multiple for every portfolio company with its current valuation multiple. Across much of the portfolio, the GP had written up the valuation despite limited improvement in the businesses underneath it.

We debated the decision because we liked the manager and had known the team for years.

We eventually passed.

The GP has since experienced significant team turnover, and I am unsure of its ability to raise another fund. Had we re-upped, we would have doubled our exposure rather than allowing the existing position to run off. We would now have significant GP concentration in an underperforming manager.

The analysis mattered because it forced us to test something the relationship had made easy to accept. Without it, familiarity would probably have carried the decision.

Audax and this manager sat on opposite sides of the same problem.

With Audax, prior knowledge let us examine the process more closely and commit with greater conviction. With the other manager, prior knowledge had created comfort that the evidence no longer supported.

A re-up should not feel like a first meeting with more documents.

If an LP has followed a manager for several years, attended annual meetings, read the quarterly reports and completed earlier diligence, that history should change the next underwriting.

The basic questions should already have answers. The next process can then focus on the parts that deserve more scrutiny. Has the sourcing model kept working as the fund grew? Does the operational team have enough capacity? Are the marks supported by company performance? Are the people who built the track record still doing the work?

This is where monitoring and diligence become part of the same process. The conversations between fundraises should give the LP a better starting point. They should also preserve the uncomfortable evidence that a familiar relationship can otherwise make easy to forget.

Years of work should create one of two outcomes.

Sometimes you find that the manager's process is even stronger than you understood. That can justify greater conviction and a larger commitment.

Sometimes you find that the facts have moved while your opinion has stayed in place. That should stop the re-up.

Familiarity is useful when it raises the quality of the questions.

It becomes dangerous when it lowers the standard for the answers.

In 2016, I attended an Audax LPAC with a more senior colleague.

During the meeting, I had been slouching in my chair. My colleague thought it looked unprofessional and reflected badly on both me and our organisation. It did not help that I was sitting next to Geoff Rehnert, one of Audax's founders.

Afterwards, he told me.

He was 100% right.

It would have been easy to let it go, but he gave me the feedback. I am thankful he did.

I was slouching. It looked unprofessional. He told me.

I still ramble and go off on tangents. But at least I'm sitting straight up.

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.