How an investment committee decides

An investment committee brings independent scrutiny to an investment case. Members challenge the analysis and record the reasoning behind the decision for later review.

What the memo contains

The memo is short, usually two to four pages. It states the recommendation in the first paragraph, then the thesis, the evidence and the risks. Anything the author cannot defend under questioning does not belong in it.

• The recommendation and the size of the position

• The thesis in one sentence

• The evidence, with sources

• The two or three risks that would break the case

• What would change the recommendation

How the session runs

The author presents for a few minutes and then answers questions. Good committees spend most of their time on the weakest part of the case rather than the most attractive one. The question that matters is not whether the company is good, but whether the price and the terms compensate for what can go wrong.

Why the decision is recorded

A decision that is not documented cannot be reviewed. Recording the reasoning makes it possible to ask, a year later, whether the case failed because the thesis was wrong or because the process was. Those are different problems with different fixes.

At FS Portfolio Management, the committee provides a common framework for discussing investment cases across the four disciplines.