Fund Size Is the Leading Cause of Death for Investment Firms, Notre Dame's Former CIO Argues

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What's New

Asset growth kills more investment firms than any strategy error, and allocators who accept it in exchange for lower fees get the trade backwards. Scott Malpass, Co-Founder and Managing Partner of Grafton Street Partners and former Chief Investment Officer at the University of Notre Dame, argues this in a podcast on How I Invest. Managers who outgrow their strategy get sloppy, get greedy, and start living off management fees, and the incentive break shows up in returns years later. Malpass paid premium carry to managers who earned it and negotiated capacity rights instead of fee cuts, so the firm stayed small enough to keep performing. Allocators chasing fee concessions from scaling managers should ask whether they are buying the wrong thing.

Why It Matters

The private markets fundraising machine runs on the opposite assumption: that scale is proof of quality and that LPs should reward it with commitments and accept larger management fees as the price of access. Malpass challenges the consultants, investment committees, and mega-fund GPs who treat AUM growth as neutral. Grafton runs about $1.3 billion and does the same small-fund venture and lower middle market work Notre Dame did, so Malpass has a commercial stake in the thesis. The argument still cuts against him: he concedes some firms grew assets well when growth tracked a real expansion in the opportunity set.

Big Picture Drivers

Budget-based fees gave way to profit-based fees: When Malpass started, managers showed LPs a budget, set the management fee against it, and made money only through incentive compensation. Large buyout funds raising billions at higher fees changed that norm and made the fee itself a profit center.
Capital flows overwhelmed discipline: Late 1980s private equity fundraising totaled a few billion dollars globally. Today it runs to hundreds of billions every year, and institutions pushing more money into privates have removed the constraint that once kept funds small.
Founders resist growth, successors seek it: Founders in Malpass's experience led by example and stayed disciplined. New generations of partners are more transactional, benchmark their income against peers, and push new products and larger funds.
The best firms scale through new products, not core funds: Sequoia added geographies and stages for specific reasons, including a China operation Malpass calls extremely successful, while its early-stage fund stayed at roughly $500 to 600 million for decades.
Public equity managers face the hardest version of the constraint: Malpass funded emerging stock pickers early on the understanding they would grow mostly organically, because beating the market only works at small to medium size.
Pattern recognition compounds: Meeting 500 to 600 firms a year taught the team what excellence and what failure look like early, which made decisions faster over time and made the growth trap easier to spot before the numbers showed it.

By The Numbers

~35%: Share of the Nasdaq exchange Notre Dame helped build through its venture partners, by Malpass's count.
$400 million to over $20 billion: Growth in the Notre Dame endowment across Malpass's tenure, during which Sequoia's core fund stayed small.
$500 to 600 million: Size of Sequoia's early-stage venture fund today, unchanged in scale for decades.
20% to 30%+: Carry structure Malpass encouraged, starting at 20% and stepping up past 30% when a fund earned 4 to 5x, rather than a flat 30%.
25% to 50%: Share of new capital raised that Notre Dame's capacity rights entitled it to take from public managers who later expanded.
~2,000 firms met, 400+ hired or fired: The evidence base for the pattern.

Key Trends to Watch

Capacity rights as the new fee negotiation: Expect sophisticated LPs to trade fee breaks for rights over future capital raises, with approval rights in the most aggressive cases. The indicator is whether emerging managers' second and third funds grow at organic rates or jump in size.
Fee structure as a sorting signal: Malpass observes 2.5% management fees at both the smallest funds, where it keeps the lights on, and the largest, where it functions as carry. Watch whether mid-sized managers with 1.5% to 2% fees and concessions can hold that pricing as their assets grow.
Generational transitions at scaled firms: Malpass calls firms that hand off to new partners without losing culture a handful at most. The next 5 to 10 years of succession at large platforms will test whether successors keep core funds small or expand them.
Concentration returning to allocator portfolios: Malpass says big endowments still carry too many managers and too many buckets. Grafton runs long equities only, roughly 60% private and 40% public, with no real estate, private credit, or fixed income. Watch whether institutional portfolios follow toward fewer relationships.

Memorable Quotes

"Ah, the numbers are the numbers." A Houston small-cap founder's answer when asked about two bad years, which ended the meeting. Managers who hide from mistakes fail the transparency test before any return analysis begins.
"We had no problem paying up for excellence. I did not mind paying premium carries over certain IRR thresholds." Malpass says the premium-carry relationships did extremely well, so the cost of the concession never outweighed the alignment it bought.
"They just get too big for the strategy. They get sloppy. They get greedy. They start living off management fee." The mechanism by which growth breaks the incentive link between manager and LP.
"If I write a book someday on the 10 most important investment principles and what ruins a firm, size is number one. Absolutely no question." The thesis, ranked above every other failure mode.

The Wrap

The thesis holds if managers who keep core funds small and price fees to budget keep outperforming scaled peers on a net basis, and if premium carry structures continue to pay for themselves through selection. It fails if large platforms with profit-generating management fees deliver comparable net returns across cycles, or if capacity-constrained managers leave enough opportunity on the table that their LPs underperform on absolute dollars. It also fails if generational handoffs at firms like Sequoia prove that disciplined scale is repeatable rather than rare. The current fundraising cycle, with hundreds of billions raised annually into ever-larger vehicles, gives the market a live test. The next 5 to 7 years of realized returns from the 2021 to 2025 mega-fund vintages will show whether size is the primary cause of firm failure or just one input among many.