Investing and allocating capital
What Should Happen When an Investment Falls Outside the Family's Agreed Limits?
Short answer. Treat an out-of-limit proposal as an exception that needs review before the family commits capital. Identify which limit it exceeds, why the proposal may still fit the family's objectives, and what risks or safeguards change. Route it to the authority named in the governance policy, then document approval, conditions, or rejection.
Pause an investment that falls outside the family's agreed limits and send it through a defined exception review before committing capital. An exception may be worth considering, but the family should make that choice consciously and record why it fits its objectives despite the limit.
Identify the Limit and the Reason
First specify what the proposal exceeds. It may be a concentration cap, an asset class range, a manager limit, a liquidity condition, or an authority threshold. Confirm the relevant policy version and current portfolio position. Sometimes the apparent breach comes from a valuation change or a new commitment that has not been reflected in reporting, so establish the facts before deciding.
Then ask the sponsor to explain why the investment is being proposed anyway. The written case should address its fit with the mandate, the risks created by the exception, the family's capacity to hold it, and any alternatives. If a related party or family member has an interest, disclose it and follow the conflict process.
Use the Right Approval Path
Follow the authority described in the family's governance policy. Staff should not treat an exception as approved simply because a senior person likes the idea or because a deadline is approaching. The policy may require investment committee approval, family consent, or review by an independent adviser. If the policy does not address this kind of exception, defer the commitment while the appropriate authority decides how to proceed.
Review whether the proposal needs additional diligence or outside expertise. A committee can assess whether the exception is proportionate and whether safeguards can reduce the risk. Those safeguards might include a smaller commitment, a staged funding plan, reporting requirements, or a time-limited approval. The family should be clear about who monitors those conditions and what happens if they are not met.
Record and Monitor the Outcome
Document the facts, the limit involved, the recommendation, the views considered, and the final decision. If approved, state the scope of the exception, any conditions, and when the family will review it. If rejected, record the rationale so the same proposal does not return without new information. Update the portfolio records and notify the people responsible for implementation.
Repeated exceptions can signal that the policy no longer reflects the family's strategy, or that the team is not following it consistently. Review the pattern with the investment committee and decide whether the limit should be formally revised. Do not quietly treat one exception as a permanent change to the mandate.
Related resources include single family office governance, investment committees and advisory boards, investment approval authority, and documenting investment decisions.
Investment committee and investment process construction is critical to a family office's success
Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.