Happy Thursday and welcome to another edition of Beyond TVPI.

Looking back, one thing about my ten years as an LP surprised me. I thought I was trying to identify the next exceptional manager. In reality, I had developed a very different investment philosophy - one I only fully understood after leaving the industry.

This week, I reflect on that realisation, and why your style should match your organization.

In Founders Corner, I reflect on a question that made me redefine risk entirely after becoming a father, and how it ultimately shaped my decision to start FundFrame.

As always, if you have any questions or comments, please hit the reply button and let me know.

Enjoy the read,

Steffen

Looking back, one thing about my investment style surprises me.

I joined an upstart fund-of-funds when it was still in its early years. Ten years later, I left to start a bootstrapped software company from scratch.

Neither decision exactly screams “risk-averse.”

Yet when it came to allocating capital, I was remarkably conservative.

Not in the sense that I avoided risk. Private equity is a risky asset class by definition. But I rarely found myself asking, “Could this be the next legendary manager?” More often, I was asking a different question:

“What could go wrong here?”

In hindsight, I think that part of my decision-making had more in common with a credit investor than a venture capitalist.

A great credit investor isn’t trying to find the handful of loans that produce extraordinary returns.

The objective is to build a portfolio where very few things go seriously wrong. Most loans will perform broadly as expected. The challenge is avoiding the defaults, because those few mistakes can erase the gains from many good decisions.

That mindset felt surprisingly familiar.

Of course I wanted to invest with exceptional GPs. Everyone does. But if I had to choose between identifying one future top-decile manager or consistently avoiding the managers that would disappoint over the next decade, I’d take the latter every time.

For the portfolio I was building, the cost of being slightly wrong was simply too high.

I don’t think this is true for every allocator.

For most of my career, I invested in US lower middle-market buyout funds. It was a deep opportunity set with hundreds of capable managers. There was certainly dispersion between the very best funds and the rest.

But there were also many genuinely good managers.

That meant I didn’t need to identify the best fund to generate an excellent portfolio. I needed to consistently back good managers while avoiding the ones that looked compelling during fundraising but ultimately failed to deliver.

To me, that was where the alpha was.

Not in finding every future superstar.

In making remarkably few bad decisions.

Now compare that with venture capital.

If returns are driven by power laws, avoiding mistakes isn’t enough. Missing the next Sequoia or Benchmark may be more costly than backing several managers that never quite work out.

The same can often be said for allocators focused on first-time managers.

Those strategies require a different mindset. You almost have to swing harder because a disproportionate share of the returns comes from a very small number of winners.

That’s a completely rational way to invest.

It just wasn’t the game I was playing.

This also helps explain something I’ve written about before: why experienced LPs can look at exactly the same GP and reach completely different conclusions.

It’s tempting to think one of them must have better judgment.

Often, that’s not what’s happening.

They’re simply optimizing for different outcomes.

One allocator is trying to maximize upside.

Another is trying to minimize the probability of a permanent mistake.

The same GP can look attractive through one lens and unattractive through the other.

Neither approach is objectively better.

They’re simply different philosophies, designed for different mandates.

One of the lessons I took away from a decade on the LP side is that every allocator is solving a slightly different optimization problem.

Some should chase outliers.

Some should avoid mistakes.

The difficult part isn’t deciding which approach is better.

It’s knowing which game you’re actually playing - and making sure it matches the mandate of the institution you’re investing for.

Your investment philosophy shouldn’t just fit the asset class. It should fit your Investment Committee, your Board, and ultimately the organization whose capital you’ve been entrusted to manage.

That’s where alpha is found.

FundFrame Diligence structures, and analyzes the data from PPMs, DDQs, track records, and other diligence materials, turning hundreds of pages into a consistent, auditable and error-free analysis. This means less time gathering information and more time making decisions.

You can learn more here.

People sometimes ask whether leaving private equity to start FundFrame was the biggest risk I’ve ever taken.

Most people would probably say it was.

But becoming a father changed how I think about risk.

Around that time, I came across a question from Graham Weaver, Managing Partner at Alpine Investors, that resonated:

“What would you dare to do, have or be if you knew you would not fail?”

For me, the answer was surprisingly clear.

The biggest risk wasn’t starting a company. It was looking back in twenty years and realising I hadn’t spent enough time with my son while he was growing up.

Those years won’t come back.

The flexibility to choose where and when I work has become far more valuable than I ever imagined. That’s one of the reasons I started FundFrame. I probably work more than ever - but I do it on my own terms.

The main article argues that every investment philosophy should match the game you’re playing.

I’ve come to believe the same is true for life.

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.