Now, more than ever, the words “certainty” and “predictability” and their antonyms “uncertainty” and “unpredictability” are being peddled in every corner of financial markets to illustrate varying degrees of vulnerability in the current economic environment. Standing back and marveling at the psyche of investors, it is hard to overlook how sentiments shift faster than a government official ensnared in a honey pot espionage scheme. Historically, “uncertainty”, an unquantifiable form of risk, has been broadly categorized as a potential catalyst for exceptional returns, along with the inherent potential for extraordinary losses. The general messaging around “uncertainty” has historically been phrased something like “A skilled manager with extensive experience can find opportunities and success in uncertain markets due to being cycle-tested, having relatively higher patience levels, ardently adhering to fundamentals, knowing which areas to avoid, possessing operational prowess,……..” I believe that all the aforementioned guidance points still hold weight, but it seems these days that “uncertainty” has taken on a more rugged, prickly, and detonation-prone demeanor, which is freezing most forward motion. In the current environment, the word “uncertainty” somehow feels more rowdy and even ominous than ever before because its historical foundational bedrock seems harder to find. Adhering to the fundamentals, staying the course, and applying operational know-how as a buffer, somehow do not seem to provide adequate actions for directional discipline because regulatory vacillation, the fragility of the rule of law, and the haphazardness of trade policies, among other factors, appear to suggest that everyone should just do nothing for now. We are living in interesting times!
Keeping with the same “uncertainty/unpredictability” theme but in a completely different and positive context, I have a likely controversial take on GP unpredictability – “I have come to prefer GPs who have some unpredictability to their personality.” I understand this is a provocative statement, but the provocation is intentional, and this conclusion, as you might expect, arises from a strictly backward-looking perspective. A developing analyst would never start a 10-plus-year relationship seeking unpredictability, but a “relatively” seasoned analyst with market cycle scars and GP burn marks can introduce a hint of “good” unpredictability into the mix of attributes sought.
The managers, and consequently, the deals (portfolio companies) in which I have invested that have generated the best returns, have almost always had a tinge of unpredictability and danger about them. These successful investments sometimes veered into the unsettling, reminding me to trust the due diligence conducted before the keys were handed over (commitments were made). I am not saying that GPs have not been known to stray adversely or even become completely unrecognizable in some circumstances, but I am saying that manager investment decisions that do not neatly align with an LP’s pre-defined expectations are not always necessarily bad.
I unpack some of the reasons why I think it is a good thing for GPs to stay dangerous:
- You chose an “expert”: In theory, and hopefully in reality (hopefully confirmed during due diligence), your GP/manager is participating in their strategy market ecosystem a lot more than you, the LP. The GP observes more, listens more, interacts more, contemplates more, encounters more, etc., in their market than their LPs ever do (or should). This intimate market knowledge can yield investment opportunities, structures, and plays that may appear unfamiliar to LPs. That weird, piercing feeling in the pit of your stomach when your GP previews their newest deal with scary details that make you want to call your Mom should not always signal style drift or initiate the bestowal of the title of “renegade” to that manager. The manager could merely be keeping up with market evolution, or better yet, be ahead of its peers. Sometimes, magic happens where the fear resides.
- Pandering is never a good look: I think, as LPs, we should all try to encourage GPs never to pander. Pandering is just a waste of time. Nothing is learned when pandering becomes the lubricant for GP and LP interactions. EQ and tact are always crucial in all communications, but pandering just feeds inauthenticity. Understandably, GPs have been trained, both explicitly and implicitly, to tone down certain aspects of their strategies’ execution. For example, no GP participates in straight-up auctions anymore, only “limited auctions” and “broken auctions” because their sourcing is all “proprietary”. Riiiiiiiiiight! Additionally, every GP brings something to the table beyond capital that resonates with their portfolio companies. Okaaaaay! This is what LPs want to hear, and sometimes it is the truth. However, the point I am trying to make, albeit in a somewhat convoluted way, is that LPs should educate themselves on the full realities of how the hand-to-hand combat of the investment business is conducted and allow GPs the opportunity to reveal the gory details, regardless of how frightening they may be. PS: I don’t want anyone to misconstrue what I am saying as condoning illegal acts or encouraging rule-breaking; I am just highlighting the fact that neat portfolio line items in a pitchbook or quarterly report often have untidy backstories.
- We can’t become what we need to be by remaining what we are: Exceptional GPs tend to challenge the status quo and hence challenge their LPs. I believe this is a genuine strength that can sometimes be identified during due diligence; however, the real challenge and discomfort arise when your capital is actually at risk. GPs will periodically confidently flirt with danger with your capital by making very concentrated bets, extremely slow capital deployment (i.e., holding large amounts of dry powder), investing in the complete opposite of their peers, ignoring news cycles and short-term market noise, looking in the most unexpected places and using the most unexpected methodologies to find opportunities, etc. Alarm bells will ring in the halls of LPs, panicked calls will be placed to GPs for sanity checks, and some LPs will even attempt to find ways to abandon their commitment. However, a confident manager will assure you that all is well and that the ship is being operated with the care you envisioned. The only difference is that, based on market assessment, the route the manager chose to reach the promised destination requires a higher degree of emotional tolerance than you, the petrified LP, has ever been asked to demonstrate.
Anthony Kwesi Hagan
Founder and Head of Research, FreedomizationTM
June 1st, 2025
