There are a number of different work streams that our academics and students focus on here at the Stanford Global Projects Center (GPC). One of the benefits of our center lies in the multi-disciplinary approach that is used in the research projects being conducted. The research that I am working on, along with Dr. Ashby Monk, focuses on institutional investors. Specifically how these organisations can more effectively operate and provide capital to the engineering projects (whether that be early stage innovation/venture capital or later stage infrastructure, private equity or real estate assets) that the other side of our research center looks at in detail.
Our current research has looked at how institutional investors can adopt strategies that help them achieve their long-term investment objectives. When looking at this topic, it is interesting to see how different investors have adopted different models for allocating their capital. It would appear that three distinct models have emerged in the space thus far. Firstly, there is the Norway model, which is based on the strategy of the Norwegian sovereign wealth fund (Government Pension Fund) of investing primarily in traditional public market assets – whether that be equities or fixed income. The Norway model uses a large in-sourced team with a small allocation to external managers to achieve its objectives. Secondly, you have the Yale or endowment model, which is based on adding risk to your portfolio by investing in private market asset classes through external managers. A ‘top down’ model is employed in house for the selection of an asset class/strategy with external managers then taking on most of the responsibility for the investments.
The endowment model has been based on getting priority access to well-performing external managers due to the large number of alumni from these universities that fill positions in the investment management industry. The endowment model has also been adopted by the Future Fund of Australia, without the benefits of the alumni access that other endowment investors have had. The third model is the Canadian model, employed by the large sophisticated pension fund investors in Canada, and is characterised through largely insourced (direct) investment with a higher allocation than most to private market alternative asset classes. There are advantages and disadvantages of each model and work has been carried out tracking the development of these models.
At the GPC we are working to understand, analyse, validate and propose a fourth model of institutional investment that seems to be increasingly employed by a number of investors – that is the ‘collaborative’ model of institutional investment. The collaborative model of investment essentially combines a number of the existing models, recognising that:
Against, this background, the ‘collaborative’ model focuses on developing innovative platforms and strategies by enhancing the social capital of investor organisations to improve their organisational effectiveness and invest more efficiently in private market asset classes.
We have a research project at the GPC that helps to define the ‘collaborative’ model of investing, entitled, the Re-intermediation thesis. The research work we are doing is contributing towards a series of white papers on the topic. This involves providing a theoretical validation for the strategy drawing upon sociological and social network theory. It looks at the platforms/vehicles that investors are developing amongst themselves as peers to invest more efficiently in long-term assets and get as close as they can to the direct method. These include co-investment platforms/vehicles, joint ventures and seeding managers. This also includes the platforms that direct investors are using to invest in special regions/opportunities, such as infrastructure in the US and India.
Our collaborative model acknowledges that a number of investors need to engage with managers through the indirect method and therefore looks at how this re-engagement can be defined for more alignment compared with what was occurring in the industry prior to the global financial crisis. Again, sociological theory within law and economics, specifically relational contract theory is drawn upon here to define how more aligned governance can be achieved between investors and managers.
This framework for categorising institutional investment models is not intended to be rigid. The collaborative model is premised upon taking advantage of the heterogeneity amongst the investor community to draw upon each other’s unique capabilities and knowledge to perform better as a whole. The work does not intend to design a ‘one size fits all’ categorisation. Rather it aims to provide a theoretically backed concept to help achieve the objectives of long-term investing for institutional investors.
Stay tuned for more updates and papers from the GPC!