FUND INVESTMENT STRATEGY VERSUS INVESTMENT OPPORTUNITY: Definition and Implications

In my view, an “investment strategy” is an aggregation of processes and procedures that outline how a sponsor generates (or intends to generate) value (returns) through the use of its skillset, while an “investment opportunity” refers to a current or prospective market opportunity that requires a specific skillset to unlock value (returns). When investment strategies and investment opportunities genuinely and naturally harmonize, real magic can be created in the form of expected (or outsized) returns.  

Analysts at allocator organizations are often confronted with pitches highlighting lucrative investment opportunities with exploitation prerequisites that always seem to perfectly match the strategy (or skillset) of the proposing sponsor. In a business framework, this makes absolute sense and should be expected. Why would anyone pitch an investment strategy that will be unable to take advantage of an ongoing market opportunity? The motives of an investment sponsor could not be any clearer, however, allocator analysts have the difficult task of parsing through the claims, truths, capabilities, and possible outcomes of investment strategies and opportunities that incessantly land on their desks.

There is a push and pull that analysts go through when assessing sponsor strategies and investible market opportunities. Analysts must have a versatile working knowledge of general markets, current market conditions, and investment plays that worked (or failed) in the past to effectively be convinced that a pitched investment opportunity is viable. Analysts must also have a good or decent sense of the landscape of strategies targeting ongoing market opportunities. Sometimes, sponsors pitching an investment strategy in tandem with an investment opportunity wrongly assume analyst naivete or analyst sophistication. I believe, depending on the investment sector, analysts know enough to be dangerous but are not full-fledged experts by any means. The repetitive nature of the analyst’s job, speaking with sponsors all day, may accelerate learning, or at least provide points of reference, but it is still the sponsor’s responsibility to consciously educate, explain, and clarify consequential factors as needed.

Below are some factors investment analysts consider when reviewing investment opportunities and strategies.

  • Repeatability and flexibility of investment strategies: Most analysts seek to form long-term relationships with sponsors who convincingly exhibit multiple ways of attaining return objectives. Investing with one-trick ponies would be an inefficient use of time and capital. Analysts pay keen attention to the resilience and versatility of investment strategies to help ensure the prospect of long-term partnerships.
  • Longevity of investment opportunities: Analysts typically seek sponsors pursuing investment opportunities that are not overly fleeting. Private assets investing is not a heavily trade-oriented endeavor so it is expected that opportunities will (or should) be exploitable for a decent amount of time. Like anywhere else in the market, crowds tend to gather when opportunities are apparent, but established networks and niche expertise can help insulate first movers for an acceptable period.   
  • Market timing opportunities and new relationships typically don’t mix: A word of caution I have provided to many managers is not to pitch a time-sensitive, niche, or market dislocation opportunity to new prospective investors (ones you don’t have a history with). There is a degree of trust that needs to be built before a new LP relationship will lock up long-term capital with an entity it does not know well.  
  • Differentiation of investment strategy: Analysts constantly speak to many managers who stress strategy differentiation. However, beneath the top shiny layers, it is quickly found that strategies for value creation share more similarities than differences. Investment managers who can tangibly demonstrate that their use of people, processes, and data truly sets them apart have a greater chance of attracting prospective investors.
  • Crowdedness of investment opportunity participants: Related to the above point, a run-of-the-mill investment strategy targeting well-known investment opportunities is likely to be relegated to an allocator’s “skip” pile because the space will typically be viewed as too crowded to yield desirable excess returns. Investment managers need to be appropriately self-aware and possess irrefutable differentiation ammunition when pitching/executing a strategy in a space that has been deemed crowded.