Deal-by-Deal Investing in an Era of Rapid Technological Change

There was an interesting interview aired on Bloomberg Television with early Anthropic investor Anjney Midha, where he argued that VC firms failed institutional investors by missing the AI revolution.

We think this raises an important point about how a lack of hands-on experience and technical competence can ultimately prevent institutional investors from accessing outsized alpha.

For that reason, it is inherently important for institutional investors to select fund managers with the competence to assess the potential impact of emerging technologies as they develop.

However, we would argue that this is difficult to determine when a fund mandate is created. There are simply too many variables, including technologies that may not yet exist in commercially relevant form.

This creates a dilemma for institutional investors. If the mandate is too strict, they risk missing emerging technologies with significant upside potential. If the mandate is too loose, they risk allowing the GP to allocate capital into areas where there is limited alignment with the institutional investor’s own understanding of where an industry is heading.

In this context, we believe deal-by-deal investing can be a preferable approach — or at least a credible alternative — to the traditional blind-pool model. As AI and other technologies increasingly reshape industries, having capital committed to a fixed fund mandate creates additional risks, including opportunity cost, the risk that investments become less relevant as industries evolve, and the risk that committed capital remains underdeployed.

Another issue is the increasing concentration of institutional capital among a relatively small number of established private equity firms. That concentration is understandable. Institutional investors want confidence that a GP can source attractive opportunities, execute transactions, create value, and exit investments in a timely manner.

However, concentration around a relatively small group of funds further increases the risk of opportunity costs. If those funds miss an emerging opportunity during the investment period, the institutional investor may also miss exposure to industries capable of generating the outsized returns that private equity allocations are intended to provide.

This is one of the reasons we are preparing a series of webinars for institutional investors focused on deal-by-deal investing versus the traditional blind-pool approach.

In these webinars, we will analyze the advantages of deal-by-deal co-investments in the current state of private markets and the global macroeconomic environment, and explain how these structures can work with acquisition platforms such as SBC Capital, including potential paths to value creation throughout deal execution.

More information on the schedule and detailed agenda will follow over the next couple of weeks.