In-depth guide · Wealth
The investment process in a family office: from idea to monitoring
Updated: · Leutrim Miftaraj, FLIORE · Editorial standards · Other languages: Deutsch · Français · Español
Short answer
A good investment process takes every investment idea through the same steps: pre-screening against the investment strategy, due diligence on the investment and its operations, a written investment memo, a decision by the investment committee, implementation with KYC on the counterparty, ongoing monitoring and a planned exit. This makes decisions comparable, conflicts of interest visible and mistakes traceable – even years later.
Why a fixed process
In family offices, investment ideas come from many directions: banks, friends of the family, entrepreneurs, fund managers. Without a fixed process, the persuasiveness of the person bringing the idea decides. A process protects the family from impulsive decisions, makes ideas comparable and documents why a decision was taken – the most important basis for learning later from successes and mistakes.
The steps
- Intake and pre-screening: does the idea fit the investment policy statement, the allocation and the limits?
- Investment due diligence: strategy, team, valuation, return drivers, risks, terms.
- Operational due diligence: custody, valuation, governance, fees, reporting and compliance of the counterparty.
- Investment memo: a written summary with a recommendation and counter-arguments.
- Decision by the investment committee, with minutes, conditions and position size.
- Implementation: contracts, subscription, KYC on the counterparty, payment approval under the four-eyes principle.
- Monitoring: reports, valuations, capital calls, deviations from the assumptions.
- Exit or extension according to criteria set in advance.
Contents of an investment memo
| Section | Content |
|---|---|
| Summary | Investment, amount, recommendation, main reasons |
| Fit | Role in the portfolio, contribution to the strategy, effect on allocation and liquidity |
| Return expectation | Drivers, assumptions, scenarios with a range |
| Risks | Market, liquidity, counterparty, key people, valuation, currency |
| Due diligence | Findings on the investment and its operations, open points |
| Terms | Fees, term, redemption rights, conflicts of interest |
| Counter-arguments | What speaks against the investment and why it is recommended nonetheless |
| Monitoring | Indicators, reporting obligations, exit criteria |
Conflicts of interest and independence
Conflicts arise when people involved in the process have interests of their own: commissions, personal stakes, close relationships with the provider. They must be disclosed before the decision, and the persons concerned recuse themselves. A family office that accepts no third-party payments, or passes them on in full, removes a frequent source of conflict. The CFA Institute's Code of Ethics sets clear standards for this.
Worked example (simplified)
An entrepreneur who is a friend of the family offers it a minority stake in his start-up. Pre-screening shows that the investment policy statement allows direct participations of up to 5 per cent of the wealth; the current share is 3 per cent, so there is room. Due diligence reveals that the valuation is above comparable financing rounds and that information rights are missing. The memo recommends a smaller stake with information rights and anti-dilution protection. The investment committee decides accordingly, on condition of annual reporting; the entrepreneur accepts.
What counts afterwards
Most mistakes show not at purchase but afterwards: reports fail to arrive, assumptions do not materialise, no one decides on an exit. That is why monitoring indicators and exit criteria belong in the memo from the start, and every position is checked at least once a year against its original assumptions. A review of closed investments – what was expected, what happened – improves the process over the years.
Setting sizes and limits
A good process governs not only whether to invest but also how much. The investment policy statement should set ranges for each asset class and ceilings for individual positions, such as a maximum share per direct participation, per fund and per manager. For private market investments, commitments per vintage year are added so that capital calls and distributions are spread over time. If a limit is exceeded, an explicit decision with reasons is needed.
Rules for the exit are just as important: which developments trigger a review, such as the departure of a key person, a change of strategy or a return well below expectations over several years? Recording these criteria at purchase means deciding later on the facts rather than on emotion. For the family this creates transparency: opportunities are judged by the same standards, regardless of who brought them in.
In FLIORE
FLIORE keeps memos, minutes and contracts with versions on the mandate, tracks commitments, capital calls and valuations per investment and calculates IRR and MOIC. Payments run through four-eyes approval, and the audit trail shows who decided what and when.
At a glance
| Steps | Pre-screening, due diligence, memo, decision, implementation, monitoring, exit |
|---|---|
| Core document | Investment memo with counter-arguments |
| Conflicts | Disclosure before the decision, recusal of those concerned |
Terms on this page
- Capital call
- A request by a private equity or infrastructure fund to its investors to pay in part of their committed capital.
- Four-eyes principle
- Control principle under which important transactions, such as payments, are checked and approved by a second authorised person.
- Audit trail
- An unalterable log that records who created, changed, approved or deleted which data and when.
Frequently asked questions
Does every investment need an investment memo?
Every investment outside mandates already approved should have one. For small positions it can be short; what matters are fit, risks and exit criteria.
Who sits on the investment committee?
Usually representatives of the family, the head or CIO of the family office and external experts. Clear voting rules and minutes are what matter.
How are ideas from the family's circle handled?
Like all others: through the same process. With personal relationships in particular, the process protects against decisions made as favours.
What does operational due diligence cover?
Custody, valuation, governance, fees, reporting, compliance, IT security and the emergency organisation of the counterparty.
How often is an investment reviewed?
On an ongoing basis through reports, and at least annually against the original assumptions and exit criteria.
What is a review of closed investments?
A comparison between the expectation in the memo and the actual result. It reveals systematic errors, such as overly optimistic assumptions in a particular segment.
How large should a single position be at most?
The investment policy statement sets this, depending on wealth, liquidity and risk appetite. What matters is that the limit is fixed in advance and that deviations are explicitly justified and decided.
How are follow-on financings handled?
Like a new investment: pre-screening against the limits, updated due diligence and a decision. Follow-on financings in a difficult phase in particular need a sober check of whether the original assumptions still hold.
Who may bring in investment ideas?
In principle everyone – family, team, advisers, banks. What matters is that every idea is recorded through the same intake and that anyone with a personal interest in an idea recuses themselves.
How are rejected ideas documented?
With a short reason in the same register as the approved investments. This makes it possible to trace later why an opportunity was not taken, and the same idea is not presented again without new arguments.
Sources
- CFA Institute – standards and research
- Institutional Limited Partners Association (ILPA)
- Global Investment Performance Standards (GIPS) – CFA Institute
- AIMA – due diligence questionnaires
- International Private Equity and Venture Capital Valuation Guidelines (IPEV)
This page provides orientation and does not replace legal or tax advice. The cited legal sources in their applicable version are authoritative.
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