The central task for capital allocators is to identify investment managers with a proven, durable edge—be it in sourcing, operations, or strategy—that allows them to consistently capture alpha in markets that are otherwise becoming more efficient.
CIO Lane MacDonald credits his elite hockey career for his core belief in teamwork. He emphasizes that collective success, built on sacrifice and a 'we, not I' mentality, is more meaningful and impactful than individual accomplishment, a lesson he applies to investing.
To achieve superior returns, Limited Partners should abandon a passive role and adopt a General Partner's proactive mindset. This means actively sourcing opportunities, building a network, and cultivating deep relationships, rather than just waiting for managers to pitch them.
For a private equity firm to transition successfully, founders must generously share ownership with the next generation well before it seems necessary. Ego and a failure to share equity are common pitfalls that prevent a firm from evolving from an investment shop into an enduring franchise.
Many family offices mistakenly pursue direct investing without hiring world-class, specialized teams. This makes them 'tourist investors' who take on poorly understood risks. The guiding principle should be to either build the best team or partner with the best external managers.
An effective strategy combines passive management for low-dispersion public equities with active management for high-dispersion private markets. For publics, tax-managed passive funds generate reliable tax alpha. For privates, active selection is crucial to capture significant outperformance from top-quartile managers.
Co-investing offers 'structural alpha.' By participating in average deals with average private equity managers but without paying management fees or carried interest, an LP's returns are mathematically lifted to a top-quartile level. This inherent advantage exists before any deal-specific underwriting.
Elite endowments can make financially illogical decisions due to institutional biases. Public pressure on compensation led Harvard to spin out top managers into high-fee external funds, while politically-driven divestment from sectors like oil and gas cost the endowment significant returns.
The size of a co-investment opportunity is an underappreciated factor in its alpha potential. Large, widely syndicated deals often represent market beta, while true alpha is more frequently found in smaller deals from small- to mid-cap funds where unique value-creation opportunities are more prevalent.