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读书笔记 Preface, Chapter 1, Chapter 5
张宇涵

Preface

This book contributes to ushering in a new dawn of finance-led capitalism that demands that the global community of long-term asset owners—endowments, family offices, insurance companies, pensions, and sovereign funds—be more professional and invest in long-term assets such as infrastructure, private equity, real estate, timber, and agriculture. The idea is for the ultimate principals in the long principal-agent chain of intermediaries—a chain that facilitates the flow of resources between savers and developers in our capitalist system—to take on more responsibility than they have previously and find more-aligned partnership-based vehicles for long-term investment.
We believe the collaborative or partnership-based model of investing is the latest model of institutional investment to emerge. This model focuses on channeling institutional investor capital into the long-term private-market asset classes of infrastructure, real estate, clean energy, private equity, agriculture, and timber; that is, the real economy.

Chapter 1: A Collaborative Model for Long-Term Investing

With the global population expected to increase to ten billion by 2050 and the proportion of people living in cities expected to double, the strain that this will place on existing infrastructure, housing requirements, farmland, and other natural resources will be profound. In order to avoid the effects of irreversible climate change, deepening inequality, and even military conflicts over resources, we will need to unlock large pools of long-term capital to fund resource and infrastructure innovation. We classify long-term investments1 as investments in illiquid, private-market asset classes such as infrastructure, clean energy, real estate, venture capital, agriculture, timber, and private equity that can produce attractive financial returns and, by their nature, can have significant impacts in the economy and wider society.
In the case of infrastructure, the situation is quite paradoxical. Most governments around the world are sitting on a large backlog of infrastructure projects that they are unable to fund effectively. And yet the same governments are also often in control of large pools of pension or sovereign assets that they struggle to invest effectively. Clearly, there are bottleneck issues around the way in which the largest long-term sources of capital in the world are intermediated with the long-term projects that are most in need of investment. A lot of the funding has to come from “off-balance-sheet” transactions for these governments, as many do not have the capability to fund the projects because of already high debt levels. While pension funds and sovereign funds have a primary commercial objective, we argue that their long-term characteristics make them more amenable to achieving wider long-term economic and social goals, compared with short-term-oriented, opportunistic types of investors such as certain asset management firms. On top of this, if pension funds and sovereign funds do achieve their long-term financial objectives, it is likely that these benefits will accrue back to the citizens of governments that need the funding. This book tries to address how more of these benefits can be enjoyed by asset owners rather than be disproportionately swallowed up by opportunistic financial intermediary firms.
Figure 1.1 The collaborative model of long-term investing

The Value of Long-Term Investing

When acting in a long-term manner, institutional investors are not prone to herd mentality and can retain assets in their portfolios in times of crisis, and in this way play a countercyclical role.
Figure 1.2 Performance of S&P 500 since 1970

Figure 1.3 Average holding period for stocks by decade
Figure 1.3 illustrates how short-termism has crept into the investment decision-making process for investors with the average holding period of stocks declining significantly over the last 50 years. This is true for most stock indices around the world.
The Harvard Management Company (HMC), which is responsible for the investment of Harvard University’s endowment fund, illustrated how institutional investors can be crippled by short-termism. In the 2008–2009 financial crisis, because of the lockup of its capital in risky derivative instruments offered by external asset managers, HMC faced a liquidity crisis to cover its operating budget. As a result, HMC was forced to sell a number of its stakes in illiquid asset classes at large discounts, resulting in large losses for the endowment. In this way, HMC suffered as a result of not taking advantage of its position as a long-term investor to reduce the effects of cyclical downturns.
The OECD summarizes the importance of long-term investors in three ways: they provide patient capital that yields higher net investment rates of return by taking advantage of illiquidity premia and lowering turnover; they provide engaged capital that promotes better corporate governance as shareholders are encouraged to adopt ongoing and more direct roles in investment strategies; and finally they provide productive capital that supports sustainable growth, such as infrastructure development and green energy, and fosters competitiveness and economic growth.
Clean-technology companies that help mitigate climate change require significant amounts of financing and should be ideally suited to long-term institutional investors. In the past, in order to access green energy opportunities, investors would normally seek out a third-party asset manager to do an inventory of the investible assets and make investment decisions. But the scale and time horizon of these companies do not often fit within the fund structures of existing intermediaries, which is partly why so few investors made attractive returns in this sector over the past decade. In our view, the best sources of capital for clean-technology companies are more often than not LTIs. LTIs have intergenerational time horizons and deep pockets, which makes them valuable partners for capital-intensive and long-gestation companies. In this way, by leveraging off their key attributes (scale and time horizon), institutional investors stand to make attractive returns and have significant impact.

Barriers to Long-Term Investment

The market for investing talent is highly competitive, and there are considerable challenges in attracting the necessary expertise because of restricted compensation levels and relatively fewer staff in organizations such as public-sector pension funds and sovereign wealth funds.
The average tenure of a chief investment officer is approximately four years, meaning that long-term investing can provide a significant career risk. The tenure for more junior staff may be shorter and there can be significant pressure to perform within this period to achieve career progression. As a result, assets with a short time frame may be more attractive to invest into.
Long-term investment requires the belief within institutions that the returns generated from making long-term investments will be large enough to justify the associated risks, such as liquidity risk. Within an institutional investor organization, principals, trustees, and managers must believe strongly in a long-term investment strategy and understand counterarguments before investments can be made.

The Challenges with Delegated Investing

While managers exhibited a certain amount of investment skill as depicted by their gross returns being greater than public-equity benchmarks, the lack of superior return for the LPs implied that “rents” were earned by asset managers. Whatever outperformance might have been achieved may not account for the higher risk (e.g., leverage) and illiquidity of the transactions.
From the CEM benchmarking database, it was deduced that the average private-equity annual cost was 3.41 percentage points, followed by hedge funds at 1.43 and real assets at 0.84. These figures, however, also include investors who have used internal teams to access the asset classes. The typical “2-and-20” external private-equity fund compensation structure can result in a cumulative investment cost of 5 to 7 percentage points per year under a wide range of performance assumptions and after portfolio construction costs have been accounted for. If investors are expecting a 5 percent illiquidity premium on these private-market assets, they may end up spending the entire premium on fees.
In some cases, asset management firms have misled investors about the fees that they are charging. Many LTIs present incomplete fee pictures in their annual reports; some funds focus only on base fees and bury performance fees in net return numbers, while others make no attempt to quantify the implicit fees associated with holding, moving, or trading assets (despite the fact that the implicit numbers, such as spreads and transaction costs, can be very high).

A Framework for Reframing Finance

1. Economic action is a form of social action. While economics adopts the rather unrealistic actor—Homo economicus—sociology takes real actors in their interactions as the point of departure. Economic actions typically are not only determined by self-interest. Trust, norms, and power influence economic actions and therefore invalidate the pure self-interest assumption. Related to this, no economic action takes place in an abstract space; there is always a broader social context, which affects the actions of the individual. Economic sociology emphasizes that an actor’s search for approval, status, sociability, and power cannot be separated from economic action. The decision to work for an asset management firm over an asset owner is an example of this.
2. Economic action is socially situated, embedded in ongoing networks of personal relationships, rather than being carried out by “atomized actors.” Institutional investors should systematically build an efficient and effective network to help them gain access to attractive investment opportunities as well as to help with knowledge sharing and general organizational development.
3. Economic institutions are social constructions. Understanding the historical context helps to acknowledge the inertia and difficulty that may be encountered in promoting change.
Figure 1.4 Rationale for the collaborative model of institutional investment

Chapter 5: The Future of Long-Term Institutional Investment

Re-intermediation, which is the central tenet of this book, is about investors approaching all relationships, with peers, fund managers, and stakeholders of all kinds, in new ways. Specifically in the case of managers, re-intermediation means rebalancing the power asymmetry that has too often favored managers and weighting it back to more appropriately represent investors’ and beneficiaries’ interests.

The Collaborative Model—Implications for Investors

Co-investing with peers allows certain investors to achieve necessary scale in a more-aligned way and also helps large investors reduce their risk concentration in any particular asset. This was particularly evident in the co-investment platforms that have been created for the infrastructure asset class. Having a diverse investor base also brings differing viewpoints and expertise to the table with the investments. By building trust with respected partners, a family of peer investors can be created that can be the first port of call for future investments, as has been the case for TIAA-CREF with its investment partners in its initial agriculture platform. The key aspect in co-investment arrangements is for the parties to understand the respective competitive advantages and what each party might bring to the table in a collaborative endeavor (over and above just an outlay of capital).
With regards to the question of competition versus collaboration, Powell’s (1998) research on collaboration among biotech firms seems applicable to LTI collaborations: “Since a competitor on one project may become a partner on another, the playing field resembles less a horse race and more a rugby match, in which players frequently change their uniforms.” He also notices from his study on the biotechnology industry that heterogeneity and interdependence are greater spurs to collective action than homogeneity and discipline, which is a prime motivator for collaboration among heterogeneous institutional investors.
While the collaboration strategy we talk about here is about organizations pooling together, the personal relationships between individuals will determine the success or failure of the overall organizational objectives.
While a basic CRM software tool may suffice in the beginning, a modeling tool that tracks both the relational and structural dynamics of an investor’s network may need to be developed.

Social Capital Manager (Head of Social Capital)

The SCM would be someone who can develop relationships as well as match people from inside their own institution with people from outside in a way that adds value for all parties. The SCM would need to have intimate knowledge of the institution and a deep understanding of long-term investing and its value drivers. The SCM would also need a wide network of contacts from which to design and build opportunities (e.g. deal flow, co-investments, access, information, talent, and insights). The SCM would likely be part of a strategy division of an organization and vary in function depending on the type of investor.
With the preceding job description, the SCM would require a diverse set of skills. First, having a command of the organization would mean having a strong track record in finance with knowledge and experience in asset allocation, transaction execution, and investment analysis (knowing how performance measures/valuations are calculated). Being able to understand the impact of macroeconomic features on portfolio performance as well as sectoral trends would also be crucial. Importantly, the SCM would need to have a broad perspective of the organization and industry to understand where value can be created. Having a strong investment track record would provide credibility when engaging in conversations with other potential investor collaborators.
Interpersonal skills are a prerequisite for the role of a SCM. An SCM would be constantly on the road, meeting with people and attending conferences. The interpersonal skills of an SCM would, however, be somewhat different from those of salespeople or in some cases investor relations personnel at investment management firms. The SCM would not just be about closing a sale. An SCM needs to have a deeper empathy of what motivates potential long-term partners, be very good at reading people, and develop relationships well enough to be able to be frank about decisions and strategies. As identified earlier, trust and long-term partnership characterize the types of relationships sought after. SCMs would need to approach the role holding those values strongly.
As mentioned earlier, origination of opportunities and obtaining sources of deal flow are also crucially important factors that an investor’s network can assist with. Just as an investment management firm relies on its relationships with various actors for its deal flow—receiving investment teasers from investment banks, hearing about opportunities from commercial bank capital restructurings, or building relationships with industry or sector specialists—SCMs can also help develop primary or secondary relationships that lead to various investment opportunities. An SCMs skill set would include being able to relate to a wide range of industries and make contact with potential sources of investment opportunities in diverse areas.

Intermediaries of the Future

One thing for certain is that a remodeling or restructuring of the existing business models for some of these firms is required. For example, instead of investment consultants doing research on investment managers, these organizations could extend their capabilities to start appraising actual asset opportunities or use the knowledge gained in their work on investment managers to consult governments on how they can structure investable infrastructure products. Traditional financial and accounting consulting firms that already have relationships with institutional investors and governments for other services and have already developed a certain amount of trust could be used to provide deal sourcing and organizational building services to their clients. These firms would be well placed given their global presence and suite of services that they provide in general business and financial activities.
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