When things look too good to be true, they typically are. Firms often want to hide their flaws: investments that didn’t work, changes to process that went undocumented, blips in the track record, regulatory events, organizational changes, and so on. Burying details is ill-advised. Institutional investment management research professionals want to work with investment managers who “get it”; managers who are comfortable enough to be honest and forthcoming about their history. Perhaps these professionals believe there is a correlation to being forthcoming in the future? Due diligence requires that institutional investment management research professionals fully vet all aspects of a firm and its offering. It does not, however, require perfection. Managers have stories and histories—this is their strength. An investor looking at a private equity offering whose materials showed no signs of stress despite 21 unique investments, wrapped up in a pretty bow and with the manager touting “excellent market conditions” once begrudged, “we know you are going to have some dogs; everyone has a few dogs”.
What is expected is an honest reflection and the ability to articulate these lessons learned. Experience tells us that every firm has a few molehills to climb, and that molehills become tall mountains in the highly competitive world of institutional investment management, precisely at the time firms need them not to be. How many molehills can be identified? How many obstacles can be removed before the firm steps into a multi-year, costly business development plan?