Portfolio Construction for Founders

Chapter 5 of Running a Family Office Under $100M

Here's the truth about portfolio advice: most of it wasn't designed for you.

Standard portfolio theory assumes a "typical" investor. Someone who accumulated wealth gradually through salaries and bonuses over decades. Someone with predictable income, moderate risk tolerance, and a retirement date circled on the calendar. The entire framework—risk questionnaires, model portfolios, asset allocation guidance—was built for that profile.

That's not you.

You built wealth through concentrated equity in something you created. You didn't diversify your way here—you took a massive bet on yourself and it worked. You understand risk differently than someone who's never built anything. You might want to stay active in private markets. And you're probably not retiring in any traditional sense.

So why would you follow a playbook written for someone else?

What Makes You Different (Good and Bad)

You have real advantages. You can evaluate businesses—you've built one, you understand what makes companies work or fail. Your network includes deal sources. You can tolerate illiquidity because you've lived through it.

But you probably have blind spots too. Overconfidence from past success. Bias toward what you know (usually tech). Tendency to concentrate when you should spread. Impatience with "boring" investments.

A good portfolio leverages your advantages while protecting against your blind spots. That's the whole game.

Core and Satellite

The framework that works: split the portfolio into two parts, each with a different goal.

Core is 60–70%. Its job is protection. The money that ensures you're still wealthy in 20 years, regardless of what happens with your aggressive bets. Liquid, diversified, cheap, boring. If every satellite investment went to zero, the Core keeps you rich.

Satellite is 30–40%. This is where you try to outperform. Where your advantages might actually matter. Private equity, venture, direct deals, real estate.

The split serves a psychological purpose. You know the Core is safe. That lets you take real swings with the Satellite without panic. And because Satellite is sized appropriately, a bad outcome hurts but doesn't destroy you.

Core: Boring on Purpose

The Core is deliberately unexciting.

Public equities for growth. Global index funds give you exposure to the world's companies. Not stock picking, not active management, just broad market exposure at minimal cost.

Why index? Because most active managers underperform after fees. The data here is unambiguous. S&P's SPIVA Scorecard—the industry standard for measuring active versus passive performance—has tracked this for over two decades. The findings are consistent:

• Over the 20-year period ending December 2024, 94.1% of all US domestic funds underperformed the S&P 1500 Composite Index
• Over 15 years, there was not a single fund category in which the majority of active managers outperformed their benchmark—not one
• In 2024 alone, 65% of large-cap US equity funds underperformed the S&P 500

The pattern holds internationally. Over 15 years, 92.5% of global funds underperformed the S&P World Index. The more efficient the market, the worse active managers perform.

The maths on fees is brutal. Vanguard's Total Stock Market ETF (VTI) charges 0.03% annually—three basis points. The industry average for active funds runs 0.50–1.50%. On £10M over 20 years at 8% gross return:

• At 0.03%: £46.0M
• At 1.00%: £38.7M
• At 1.50%: £35.2M

That's £7–11 million transferred to fund managers for statistically likely underperformance.

Keep this simple. Three funds—US total market, international developed, emerging markets—do the job. Vanguard, iShares, or equivalent. Or you can use low-cost model portfolios. Don't overthink it. The whole point of Core is that it's cheap, simple, and doesn't need your attention.

Bonds for stability. When equities drop 30%, bonds typically hold steady or rise. This isn't just about smoothing returns. It's about having something to sell so you can buy cheap equities during crashes. Rebalancing from bonds into stocks during downturns is how you systematically buy low.

With rates where they are now, bonds actually pay something. UK 10-year gilts yield around 4.5%. UK 2-year gilts around 3.7%. Investment-grade corporate bonds 5–6%. Not exciting, but real income—and a genuine diversifier rather than the return-free risk bonds offered during the zero-rate era.

Cash we covered in Treasury. Think of it as part of Core.

Altogether, you're looking at something like 35–45% equities, 15–25% bonds, 5–15% cash. Rough numbers. Don't obsess over exact percentages.

Satellite: Where Opinions Actually Matter

This is where your advantages come into play. Also, you can hurt yourself if you're not careful.

Private equity and venture capital probably matter most for founders. You understand private companies. You've built one. Three ways to access: funds, co-investments, and direct deals.

Fund investing means committing capital to a PE or VC fund. They call money over 3–5 years, return it over years 5–12. The dispersion in returns is enormous—far wider than public markets.

Cambridge Associates data show that the median private equity fund IRR has historically been around 10–12% net of fees. But top-quartile funds deliver meaningfully more. A 2025 Fisher College of Business study found top-quartile PE funds achieved 22.5% IRR and 2.15x TVPI over the 2000–2020 period—exceeding public market equivalents by 35%.

For 2024 specifically, the Cambridge Associates US Private Equity Index returned 8.1%, with growth equity at 8.8% and buyouts at 7.9%. Not spectacular, but PE has outperformed the Russell 2000 and MSCI World over most extended time periods.

The key insight: manager selection matters more here than anywhere else. A mediocre public equity fund trails the index by a percent or two. A mediocre PE fund might return half what a good one does. Bottom-quartile funds can return single digits or even lose capital.

So don't just buy exposure. Be selective. Fewer, better funds beats a scattered collection of names. If you can't access top-quartile managers—and at sub-£50M, access is genuinely difficult—be honest about that limitation.

Co-investments let you invest alongside funds in specific deals. Lower fees—often 0–1% versus the usual 2%. You see exactly what you're buying. But it's concentrated single-company risk. And think about why the fund is offering it to you. Sometimes it's relationship building. Sometimes they couldn't fill the allocation.

Direct investments—angel deals, growth equity—have the highest return potential. Also, the highest loss rate. Only makes sense if you have a genuine edge: industry expertise, proprietary deal flow, ability to add value beyond capital. If you don't have an edge, you're just providing capital at a disadvantage.

Real estate is worth separate attention. Income, appreciation, inflation protection. Real assets you can touch. Investors like it because it's tangible in a way that financial assets aren't—psychologically grounding when everything else is volatile.

Direct ownership gives you control and tax benefits. Also, tenant headaches and concentration. Private real estate funds offer diversification and professional management but come with fees and lock up capital for years. REITs are liquid but trade like stocks, which defeats much of the diversification benefit.

Match the approach to your level of involvement. If you want to be hands-on and enjoy it, direct ownership. If you want exposure without involvement, go with funds.

Hedge funds—it really depends as there are some really good hedge fund managers with stellar performance, but on average, the returns are not that great. The theory is good: returns uncorrelated to markets, smoothing portfolio volatility, diversification when you need it most.

The practice often is disappointing. Warren Buffett's famous $1 million bet against hedge funds—that a simple S&P 500 index fund would outperform a portfolio of hedge funds over ten years (2008–2017)—wasn't even close. He won handily.

The broader data tells the same story. From 2011 to 2020, the S&P 500 averaged 14.4% annually versus roughly 5% for the average hedge fund. In 2024, the S&P 500 returned 23%. Bridgewater's flagship Pure Alpha fund returned 11%. Citadel's Wellington fund returned 15%. Most hedge funds delivered expensive beta—market exposure with high fees, rather than genuine alpha.

Some strategies and managers genuinely add value. But identifying them (or even finding them in the first place) is hard. And the minimums, lockups, and complexity add friction.

My view: hedge funds are optional at this wealth level. If you find a manager you genuinely believe in, fine. But don't feel obligated to include them because "that's what sophisticated portfolios do."

What Family Offices Actually Do (And Whether They're Right)

UBS surveys over 300 family offices annually—their 2025 report covered 317 single-family offices with an average net worth of $2.7 billion. The 2024 strategic asset allocation broke down roughly as:

A few observations worth noting:

Family offices are reducing private equity exposure—from 22% in 2023 to 21% in 2024, with plans to reduce further to 18%. The distribution drought (slow exits, subdued capital markets) has made illiquidity more painful.

They're increasing allocation to developed market equities—from 24% in 2023 to 26% in 2024, with plans for 29%. Public markets offer access to growth themes (AI, healthcare, energy transition) that were previously private-market territory.

40% see active management as effective for diversification—but this is about manager selection in specific strategies, not trying to beat broad indices.

Here's the thing, though. Many follow each other. Endowment envy is real. "Yale does it this way" has driven a lot of allocation decisions that may not make sense for smaller pools of capital.

The useful signal: more alternatives than retail, emphasis on private equity and real estate. The less useful: exact percentages. Don't copy allocations designed for $500M when you have £25M. You can't diversify across 15 PE managers. You won't access the same funds.

Take the direction, not the numbers. And speak to a qualified wealth adviser or investment manager who can help you with an asset allocation that will suit your particular goals.

Common Mistakes

Illiquidity creep. Each PE commitment seems manageable. Fund A calls £500K over three years. Fund B another £500K. A syndication here, a direct deal there. Then you add it up: committed but uncalled capital plus money already locked equals 60% of your wealth tied up for years.

A founder committed to four PE funds and three venture funds in his first year post-exit. Seemed reasonable—each was 5–7% of his portfolio. Then the capital calls started overlapping with a real estate opportunity he actually wanted. He had to pass on the deal he wanted because his liquidity was locked in funds he was lukewarm about.

Keep 30–40% truly liquid at minimum. And remember: PE distributions have slowed dramatically. The distribution yield in recent years has been well below historical averages. Don't assume money comes back on schedule.

Doubling down on what you know. Tech founder puts entire Satellite into tech VC. Makes sense, right? That's where you have the edge.

Except you're already concentrated in tech. Your career is tech. Your network is tech. Any earnouts or deferred comp are tech. Angel investments you made years ago are tech. Your human capital—future earnings if you start another company—is tech.

Your Satellite should diversify away from existing exposure, not amplify it.

Fee blindness. Ignoring what you pay across the portfolio. A 2% management fee plus 20% carry sounds standard. On £5M in PE funds earning 15% gross over 10 years, fee drag can exceed £2M. That's money transferred from your pocket to managers.

Know your all-in costs. If you can't calculate your total annual fees within five minutes, something's wrong.

The contrast is stark. Your Core might cost 0.03–0.10% annually. Your Satellite might average 1.5–2.0% plus carry. On a 60/40 split of a £20M portfolio, that's roughly:

• Core (£12M): £3,600–£12,000/year
• Satellite (£8M): £120,000–£160,000/year plus performance fees

The Satellite fees are 10–40x higher. That's fine if performance justifies it. But know what you're paying.

Putting It Together

Roughly: 60% boring stuff that compounds quietly, 40% interesting stuff where you might add value. Within the interesting stuff, weight toward PE/VC and real estate, where founders typically have an edge. Be sceptical of hedge funds unless you have high conviction in specific managers. Watch illiquidity. Watch concentration. Watch fees.

Don't aim for precision. A portfolio that's approximately right and actually implemented beats a theoretically perfect allocation that only exists in a spreadsheet.

Build slowly if you're starting from cash post-exit. Deploy Core over 3–6 months. Build a Satellite over 12–18 months. Meet managers, evaluate strategies, and wait for opportunities worth taking. Cash earning 4–5% while you learn costs far less than rushing into mediocre investments because you feel pressure to deploy.

You'll make mistakes. Everyone does. The framework is about making sure no single mistake can take you out.

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I write when there’s something worth sharing — playbooks, signals, and patterns I’m seeing among founders building, exiting, and managing real capital. If that’s useful, you can subscribe here.