Recently, I’ve heard a reasonable argument from smart, successful passive investors:
Stop spreading capital across a bunch of sponsors you barely know. Find one you trust deeply, build a real relationship, and concentrate.
On the surface, it’s compelling. And it directly challenges the “diversify everything” mantra most of us grew up hearing. These same investors like to support their argument with the Warren Buffett quote saying that diversification is protection against ignorance, and that it makes little sense if you know what you’re doing.
I think there’s merit to this argument. But passive investing is more nuanced than some of these investors want to admit.
Why the Argument Makes Sense
I get this logic completely.
Depth of relationship with a GP means better access, better communication, better alignment.
You learn how a sponsor operates, how they communicate in tough markets, and how they handle problems. There’s real value in that – and that knowledge compounds over time in ways a surface-level relationship with a long list of sponsors never will.
And the contrast is stark when you look at an investor who’s in 15 deals with 12 GPs and can’t keep track of any of them.
The Part Nobody Talks About
But there’s a problem this argument misses.
The best sponsors are intensely focused. That’s what makes them great.
A top multifamily value-add operator isn’t also running car washes or a bitcoin mining fund. Their edge comes from specialization. They’re the textbook application of the Buffett quote because they absolutely know what they’re doing and stay in their lane.
The thing is though, when you concentrate with one sponsor, the implications extend beyond the relationship itself. You’re also concentrating in one strategy, one asset class, and often one market cycle exposure.
That creates a latent risk in your portfolio. If:
Their specific strategy falls out of favor
Their asset class hits a rough patch
Their market faces headwinds
They get hit by a bus
Your entire portfolio feels it. You’ve essentially tied your wealth building and preservation to a single point of failure.
A Different Way to Think About It
I talk often about portfolio construction and taking an overall portfolio approach to your investments…and that's the big missing piece in this argument.
You should always start with what you need the portfolio to accomplish for you – cash flow, tax efficiency, growth, inflation hedge, wealth preservation, or some weighted combination of all those. Then go find the best-in-class operators for each “role” in your portfolio.
It’s the best of both worlds – you end up with specialists who’ve earned their seat because they’re the best at filling a specific need.
Maybe that's a multifamily operator focused on equity growth and cash flow. An oil and gas sponsor for tax benefits. A credit fund for stability and liquidity. A development play for pure growth.
Each one focused on doing what they do best. And together, they build a portfolio that actually accomplishes what you need.
Where I Land on This
I see the appeal of concentration, and I respect the passive investors who go “all in” with a single sponsor.
But when you're constructing a passive investment portfolio, you’re better off building a roster of focused specialists, each doing what they do best, than trying to force one great operator to be everything your portfolio needs.