Investment process and its steps

The investment is a dynamic and evolving process that has been influenced by notable historical events, groundbreaking theories, technological advancements, and regulatory changes.

Successful investment process involves a combination of strategic asset allocation, prudent security analysis, risk management, and ongoing monitoring, all of which have evolved significantly over the years to meet the needs of investors in an ever-changing financial landscape.

GCAM Investment Group has been successfully helping corporate clients from all over the world at various stages of the investment process for many years. We offer project finance and long-term lending, and also provide financial engineering services (including the development of financial models), management and control over the implementation of investment projects.

Our team is represented by experienced specialists with extensive contacts in European Union, North America, the Middle East, Central Asia and other regions.

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Investment process: definition, elements, facts and figures

The term "investment process" refers to the systematic series of steps and strategies used by private individuals, institutions, and businesses to allocate capital with the expectation of generating returns and achieving financial goals.

This process involves the analysis, selection, and management of various financial instruments, assets, or ventures in order to optimize risk and return.

Different financial scholars, theorists and successful entrepreneurs have put different meanings into this formal definition, leaving their mark on the dynamic concept of the investment process.

John C. Bogle, the pioneer of index investing, highlighted the importance of simplicity in investing: "In investing, you get what you don't pay for."

From the other side, Warren Buffett, considered one of the most successful investors of all time, emphasizes a long-term approach to this process: "The stock market is designed to transfer money from the Active to the Patient."

Throughout history, various events have shaped the investment process. For example, the Wall Street Crash of 1929, followed by the Great Depression, led to the development of stricter securities regulations and the establishment of the U.S. Securities and Exchange Commission (SEC) in 1934. This regulatory body aimed to restore investor confidence and maintain market integrity.

Today, global investments play a crucial role in the world economy, facilitating capital flow across borders, fostering economic growth, and diversifying investment portfolios.

In 2022, global Foreign Direct Investment (FDI) inflows totaled approximately $1.28 trillion, while the United States and China remained the most popular destinations for foreign direct investment with indicators at $318 and $180 billion, respectively. Last year, total global real estate investment (including all types of investment) exceeded $7 trillion. At the same time, in recent years the investment process has changed significantly, becoming more flexible and intensively using innovative technologies and more sophisticated financial instruments.

Emerging markets have become increasingly attractive to investors seeking growth opportunities.

Developing countries such as China, India, Indonesia and Brazil have experienced robust economic growth and attracted significant foreign investment. Technology has revolutionized the investment landscape, with fintech platforms and algorithmic trading making it easier for individuals and institutions to invest globally. These innovations have democratized access to global markets.

Here's a brief description of the investment process with some interesting facts and numbers.

Asset allocation

The investment process begins with determining the appropriate allocation of capital among different asset classes, such as stocks, bonds, real estate, and cash equivalents.

The goal of asset allocation is to optimize the risk-return trade-off by spreading investments across a mix of assets that have varying levels of risk and return potential.

The idea of modern portfolio theory, developed by American economist Harry Markowitz in the 1950s, was a groundbreaking contribution to this phase. Markowitz's work laid the foundation for understanding the importance of diversification in managing risk.

Studies have shown that asset allocation is the primary driver of a portfolio's performance. It typically accounts for over 90% of a portfolio's variability in returns, highlighting its significance in achieving investment goals. Strategic asset allocation involves setting long-term target allocations to various asset classes and periodically rebalancing the portfolio to maintain those targets.

Tactical asset allocation, on the other hand, involves making short-term adjustments based on market conditions or economic outlook.

Security analysis

Once the asset allocation is decided, investors delve into security analysis.

Security analysis is the process of evaluating financial instruments (such as stocks, bonds, and derivatives) to determine their investment potential, including their intrinsic value, risks, and suitability for a portfolio. This analysis is essential for investors, portfolio managers, and analysts to make informed decisions.

Notably, Benjamin Graham, often considered the father of value investing, published his influential book "Security Analysis" in 1934. Graham's work emphasized the importance of intrinsic value and margin of safety when selecting securities. Warren Buffett often emphasizes the importance of thoroughly understanding the businesses behind securities and investing for the long term.

Modern security analysis is often divided into two main approaches: fundamental analysis and technical analysis.

Fundamental analysts examine official financial statements, industry trends, and economic factors to evaluate securities. Technical analysts primarily analyze price and volume data to make investment decisions. Security analysis is not limited to domestic markets. Investors and analysts often conduct cross-border security analysis to identify investment opportunities in international markets and diversify portfolios.

Investment selection

Investors tend to select specific investments based on their analysis.

The selection process often considers various criteria, including financial performance, valuation, trends, and risk assessments.

Investment selection is the process of choosing specific financial assets or securities to include in an investment portfolio based on factors such as risk-return potential, diversification, and alignment with the investor's strategy. It involves analyzing individual investments within classes, industries, or regions to make informed decisions that contribute to the overall portfolio's objectives.

In 1973, the first index fund, pioneered by John Bogle and his firm Vanguard, was launched.

This innovation provided a passive investment strategy that aimed to match the performance of a broad market index, reducing the need for active stock picking.

In practice, modern investment selection can involve choosing between active and passive management. Active management aims to outperform the market by selecting individual securities, while passive management involves replicating the performance of a market index. Passive strategies have gained popularity due to lower costs and the efficient market hypothesis.

Risk management

Investors implement risk management strategies to protect their investments.

Risk management involves strategies and techniques to identify, assess, and mitigate potential risks in portfolios.

The development of modern risk management techniques, including options and futures contracts, gained momentum in the 20th century. Since the time of Robert Merton, who made significant contributions to financial derivatives in the 1970s, the concept of risk management has evolved with the development of more sophisticated financial instruments and risk modeling techniques.

It now incorporates complex mathematical models, computer technology, and a broader understanding of financial market dynamics to better quantify and manage risk. Additionally, risk management practices have become more integrated into financial institutions and investment processes to address a wider range of risks, including market, credit, liquidity, and operational risks.

Monitoring and rebalancing

Regular monitoring and rebalancing of the portfolio are crucial to ensure it aligns with the investor's goals and risk tolerance.

Let's take a closer look at these elements of the investment process.

Regularly tracking the performance of investments in a portfolio to ensure they align with the investor's goals. Monitoring involves assessing particular securities, asset classes, and the overall portfolio to identify any deviations from the desired allocation.

Adjusting the portfolio by buying or selling assets to bring it back in line with the target asset allocation. Rebalancing is necessary because market fluctuations cause the allocation to drift over time, potentially exposing the portfolio to more risk or lower returns than intended. It aims to maintain the desired risk-return profile.

Globalization and innovations

As we can see, the investment process has been revolutionized by technology.

In 1971, the Nasdaq Stock Market became the world's first electronic stock exchange, paving the way for high-frequency trading and algorithmic investing. The proliferation of the so-called online brokerage platforms in the late 20th century greatly democratized access to financial markets, allowing individuals to execute trades from their computers or mobile devices.

With the advent of computer technology, portfolio management became more efficient. Flexible robo-advisors, such as Betterment and Wealthfront, emerged in the 21st century, automating the monitoring and rebalancing process for individual investors.

With globalization, investors have access to a broader range of investment opportunities. The integration of financial markets accelerated in the late 20th century, leading to increased cross-border investments and the growth of international mutual funds and exchange-traded funds.

7 steps of the investment process explained

In a world where financial success often hinges on well-informed decisions, navigating the complex landscape of investments requires a structured approach.

The realm of finance is a dynamic arena, and the path to building and preserving wealth demands a comprehensive investment process, a meticulously crafted roadmap for investors and institutions alike.

The investment process involves several standard steps that help individuals or institutions make informed decisions about allocating capital and managing investments. The popular concept of the “7 steps of the investment process” has evolved over time to address the complexities of modern financial markets. It draws from decades of research and experience in investment management.

We should remember, that any business process is highly customizable. It can be tailored to particular investors, and various financial goals and opportunities. These steps may be applicable to varying degrees to processes organized by private investors, funds or companies of various sizes.

Here are the seven typical steps of the investment process, explained:

Step 1 – Setting investment goals

The first step is to define clear investment objectives.

This could include general goals such as achieving a certain level of wealth. Establishing these goals is crucial both for individuals and for companies because they determine the time horizon, risk tolerance, and return expectations.

Setting investment goals includes the following:

• Defining corporate objectives: In this initial stage, large corporations and institutions set clear investment objectives that align with their strategic goals. These objectives revolve around capital allocation for business expansion, innovation, mergers and acquisitions, or optimizing financial performance of the company and its projects.

• Determining investment horizon: Companies establish their investment time horizon based on the nature of their projects. Whether it's a short-term capital injection for a product launch or a long-term investment in research and development, the time frame is critical.

• Quantifying financial targets: Precise financial targets are assigned to each investment goal. Large companies use these targets to formulate comprehensive financial plans, which detail the amount of capital required and the expected returns on investment.

Step 2 – Risk assessment

After setting investment goals, it's essential to assess the risk tolerance. This involves evaluating your willingness and ability to take on risk. Factors such as financial situation of the company, and market trends play a role in determining your risk tolerance.

High-quality risk assessment helps guide asset allocation decisions:

• Evaluating risk tolerance: Large corporations assess their risk tolerance in a corporate context. This involves gauging their willingness and capacity to withstand some financial fluctuations and market uncertainties. It's a critical aspect of strategic planning.

• Business life stage: The stage of a company's lifecycle plays a role in determining risk tolerance. Start-ups may embrace higher risk for rapid growth, while mature corporations may adopt a more conservative approach to protect assets and shareholder value.

Step 3 – Asset allocation

Asset allocation involves determining how to distribute capital among different asset classes, such as stocks, bonds, real estate, and so on.

The allocation should align with your investment goals and risk tolerance. Typically, higher-risk assets like stocks are favored for long-term goals, while lower-risk assets like bonds are chosen for short-term objectives.

There are two elements to an asset allocation strategy in the context of the investment process:

• Strategic diversification: Large companies strategically allocate their resources among various investment categories, including research and development, capital expenditures, market expansion, and cash reserves. Diversification is a key to balance risk and reward.

• Balancing growth and stability: Asset allocation for corporations considers the trade-off between growth and stability. High-growth investments may involve product development or market expansion, while stable investments could include maintaining cash reserves for operational needs.

Step 4 – Security selection

Once the company have decided on asset allocation, the next step is to choose specific investments within each asset class.

For example, if you've allocated a portion of your portfolio to stocks, you'll need to select individual stocks or equity mutual funds. Research, analysis, and due diligence are crucial in this step to identify investments that align with the company's goals and risk profile.

Security selection in the context of investment process includes the following:

• In-depth investment analysis: Large corporations conduct comprehensive due diligence when selecting investments. This may involve evaluating potential acquisitions, assessing the feasibility of new projects, or scrutinizing partnerships and joint ventures.

• Risk management strategies: Corporations comprehensively assess risks associated with each investment. Factors such as market volatility, regulatory compliance, and operational risks are meticulously considered to safeguard corporate assets.

Step 5 – Portfolio construction

After selecting specific securities or funds, company builds a diversified investment portfolio.

Diversification helps spread risk by investing in different assets or securities to reduce the impact of poor performance in any one investment. Portfolio construction aims to achieve a balance between risk and return based on previous asset allocation decisions.

Portfolio construction principles for large companies:

• Strategic capital allocation: Large businesses construct portfolios by allocating capital to various projects or initiatives. These projects may encompass infrastructure development, technology upgrades, or diversifying into new markets or industries.

• Optimizing risk exposure: Portfolio construction involves strategically managing overall corporate risk. Understanding how different projects or investments interact with each other helps corporations optimize risk exposure across their portfolio.

Step 6 – Monitoring and rebalancing

Once the portfolio is established, it requires ongoing monitoring.

This involves regularly reviewing the performance of specific investments to ensure they remain aligned with your goals and risk tolerance. If market movements cause your portfolio to deviate from your target asset allocation, company may need to rebalance it by buying or selling assets to bring it back in line.

Monitoring and rebalancing principles are listed above:

• Continuous oversight: Companies maintain constant vigilance over the performance of their investments. This involves regular reviews and financial reports, project milestones, and market conditions to ensure alignment with corporate objectives.

• Strategic adjustments: If market fluctuations or changing business conditions cause a deviation from the strategic plan, corporations are prepared to make strategic adjustments. This may include reallocating resources, divesting from underperforming projects, or pursuing new business opportunities.

Step 7 – Review and adjustments

Periodically, investors should conduct a comprehensive review of their investment strategy.

This step includes assessing whether your investment goals have changed, whether your risk tolerance has evolved, and whether the overall investment strategy needs adjustments. Adjustments could involve changing asset allocation or revisiting security selection.

This step usually includes the following elements:

• Periodic strategic assessment: Large corporations conduct periodic assessments of their investment strategy, often in conjunction with annual financial planning or in response to shifts in industry dynamics.

• Adaptation to changing goals: Corporations assess whether their strategic goals, risk appetite, or competitive landscape have evolved. Necessary adjustments are made to the portfolio and capital allocation strategies to maintain alignment with corporate objectives.

These seven steps are integral to the investment process and serve as a framework to guide individuals, companies and organizations in making prudent investment decisions.

Although the entire process usually fits into a specific investment process flow chart, it is not static. It should adapt to changes in financial circumstances, market conditions, and business goals to help investors achieve their long-term objectives while managing risk.

About venture capital investment process

The venture capital investment process is a critical aspect of financing innovation and growth for startups and emerging companies.

Large businesses interested in venture capital investments often engage in this process to identify strategic opportunities for growth or to diversify their portfolios.

Venture capital refers to the provision of capital to early-stage, high-potential, and growth-oriented companies or startups that have the potential to become significant players in their respective industries. Venture capitalists (VCs) are institutional or individual investors who provide funding to startups in exchange for an ownership stake in the company. They often have expertise in identifying promising startups and helping them grow.

VCs usually receive equity (ownership shares) in the startups they invest in.

This aligns their interests with those of the founders and provides a potential payoff when the company achieves a liquidity event, such as an IPO or acquisition.



Venture capital investments are characterized by very high risk and very high potential returns.

VCs understand that many startups may fail, but they seek substantial returns from the ones that succeed to compensate for these failures.

The list of the companies associated with significant venture capital investments includes world-famous brands like Ant Group, ByteDance (TikTok), SpaceX, WeWork (The We Company), Uber, Airbnb, Stripe and a number of others.

For example, Uber, the ride-hailing and transportation company, raised approximately $3.5 billion from Saudi Arabia's Public Investment Fund in 2016. This investment was one of the largest single investments in a private tech company at the time.

Table: Typical steps of the venture capital investment process

№	Steps	Description and recommendations
1	Scouting and investment deal sourcing	Large businesses begin by scouting for investment opportunities within the startup and innovation ecosystem. This can involve leveraging in-house innovation teams, partnering with venture capital firms, or using dedicated scouts to identify promising startups.
2	Due diligence	Once potential investment targets are identified, a thorough due diligence process commences. This includes assessing the startup's business model, technology, market potential, team, intellectual property, financials, and scalability. Due diligence aims to mitigate risk and ensure alignment with the large business's strategic objectives.
3	Investment decision	Large companies typically have an investment committee or team responsible for evaluating the due diligence findings and making decisions. Factors considered include the startup's growth prospects, competitive advantage, and strategic fit with the large business.
4	Investment structuring	If the decision is positive, negotiations begin regarding the investment terms, equity ownership, valuation, and any other conditions. Large businesses may also negotiate board seats or observer rights to have a say in the startup's strategic direction.
5	Investment execution	The legal and financial aspects of the investment are finalized. Legal agreements, such as investment contracts and shareholder agreements, are drafted and executed. Funds are transferred to the startup, and the investment is officially made.
6	Post-investment involvement	Companies providing large investment loans often play an active role in guiding the startup post-investment. This usually involves providing strategic insights, access to industry networks, and mentorship to help the startup achieve its growth objectives.
7	Monitoring and value addition	Ongoing monitoring of the startup's progress is crucial. Businesses track key performance indicators (KPIs), financial milestones, and operational developments to ensure that the investment aligns with their strategic goals.
8	Exit strategy	At some point, companies consider exit options, such as selling their equity stake, taking the startup public (IPO), or merging it with another entity. The exit strategy should maximize returns and align with the overall corporate strategy.
9	Portfolio management	Large businesses often manage venture capital investments as part of a broader portfolio strategy. This includes diversifying their investments across different startups and sectors to spread risk and enhance returns.
10	Continuous learning	Venture capital investment is an iterative process. Large businesses learn from each investment, both successes and failures, to refine their investment strategies and make more informed decisions in the future.

Venture capital investments offer businesses an avenue for innovation, access to disruptive technologies, and potential strategic partnerships. However, they also come with risks, and effective due diligence, strategic alignment, and ongoing engagement are essential elements of a successful venture capital investment process.

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