How the best firms run investment committee

“IC” - two letters that strike fear in the hearts of all private equity investors, unless perhaps you’re Steve Schwarzman or Henry Kravis.

If you’re reading this, you’ve probably pulled an all-nighter writing an IC memo with a 60 page appendix. You’ve probably also felt the pain of a managing partner grilling you, knowing full-well they never made it past the first page.

At Meridian, we have the privilege of working closely with numerous top-tier PE firms. Through our partnership with countless investors, and our personal experiences at firms like Blackstone, Thoma Bravo and CVC, we hear the same things over and over.

Here is the definitive set of rules for operating an effective investment committee:

Page limits on memos

Nobody wants to read hundred-page memos.

Investment memos should lay out the investment thesis, identify key risks, and present supporting data in the most concise way possible. You can do this in 30 pages. It seems so obvious, but you’d be shocked by how many firms do not have strict investment memo page limits.

We hear this over and over - when firms don’t enforce page limits, a page count arms race ensues. Deal teams start writing longer and longer memos, conflating “page count” with “quality of deal”. Senior partners stop engaging as deeply with the memos, defeating the entire purpose of writing them in the first place.

Pre-meeting Q&A

IC meetings are so much more effective when important questions are asked transparently in front of the whole group ahead of the meeting. Top firms will encourage IC members and other senior investors to send deal teams questions and topics for further research before the meeting. Not only does this give the deal team a chance to prepare, but also promotes senior investors to pressure-test assumptions and ensure the completeness of diligence.

Right now, even the best firms manage this process by CCing the entire IC distribution email chain.

Earlier IC memo submission deadlines

One of the most frequent things we hear from people when we ask them, “what’s one thing you’d change at your firm?” is the IC memo submission deadline.

Sunday or Monday IC submission deadlines are brutal on everyone, irrespective of seniority. The deal team spends the entire weekend jamming on the memo. Senior committee members have no time to engage with the materials ahead of the meeting.

After extensive polling, consensus says that the best IC submission deadline is Thursday at 8pm for a Monday investment committee. This gives the deal team plenty of time to polish their memos, while allowing the IC to prepare and ask informed questions.

Fast process for killing early-pipeline deals

It’s incredibly discouraging for deal teams when they work on deals for months, only to eventually get shut down at investment committee. The best PE firms have a structured process for generating fast feedback on early-pipeline deals. This forum is often called “Preliminary Investment Committee” and should require only a quick 2-page memo for deal review.

Shutting down deals early when they’re unlikely to pass the main IC has a few crucial benefits. Firstly, it frees up deal teams to work on better deals. Secondly, it allows IC the space to review the good deals in depth. Thirdly, it’s hugely motivating for deal teams to know that they have a shot at getting deals approved.

Make investment decisions in public, not behind closed doors

Investment committee is a hugely valuable asset for a PE firm. It’s the debate venue for decision-making. It’s the training ground for investors to learn how to be better. It’s the culmination of all the diligence work a deal team does.

When decisions are made behind closed doors, deal teams can feel like IC is no longer being consistent in its decision-making.

The best firms discuss the relative merits and drawbacks of deals publicly and transparently. This gives deal teams real-time feedback on the types of deals to prospect and the right areas to dig in on during diligence.

Tracking next steps and follow-ups

Nearly every discussion at IC ends with a few clear next steps and takeaways for the deal team:

“Come back to IC next week with more data on renewal rates…””Can you reduce the purchase price by 10%…?”

Whatever these next steps may be, tracking them is essential. Too many firms have no formal way to memorialize and track takeaways from IC meetings. Deal teams often come back to IC two weeks later having done a bunch of work that nobody asked for. Keeping deal teams accountable to the investment committee is crucial.

Top firms maintain clear records on what deal teams need to do in order to continue working on a deal and return to IC.

Investment Committee is your firm’s IP

IC is the single most important meeting that happens at your firm every week. It represents the culmination of all the work deal teams are doing sourcing and evaluating new deals. It’s one of the rare meetings the whole firm gets to join, and for many it’s their only exposure to the senior partners.

IC memos contain a treasure-trove of information. The Q&A and notes from IC meetings represent the collective brain and investment judgement of your firm. Today, once investment committee is over, all of this work gets buried into old, forgotten folders.

There is a better way. Leading private equity and private credit firms are already using Meridian to optimize their IC process and make better investment decisions. If you’re interested in seeing how Meridian can help your firm please reach out to sales@meridian-ai.com or book a demo.