Can Pensions and Sovereign Funds Get Top Staff Outside Wall Street?

For whatever reason, I’ve had five or more conversations in the past week about the challenge of recruiting talent away from private sector managers into public sector pension funds and sovereign funds. The latter are in the process of building up internal teams (or doing other creative initiatives), and they are desperate for smart people. In short, if we’re going to try to bypass some of the unnecessary layers of intermediation on Wall Street... from a location that is geographically far from Wall Street... the question of talent will always be a pressing one. And that’s why I should not be surprised that the past few weeks have been all about “people”.

Some of my conversations have been downright inspiring: e.g., I learned from a SWF exec that he’d recruited two brilliant individuals from a hedge fund to help the internal team. But, alas, many of my conversations are downright depressing: e.g., Being told by a very smart, and sincerely nice, guy (whom I’ve been pushing hard to join the ‘rebel alliance’) that $2 million in base annual compensation (i.e., cash before carry and equity upside) was a huge pay cut and anything lower wouldn’t be worth it for him and his family. And, sigh, he’s right: This individual would be taking a 50% pay cut to do this neat-o thing I want him to do (which I can’t talk about).

This. Is the world. We live in.

The best and the brightest minds in finance truly can command salaries far exceeding what average people would deem “sane”. And, for that reason, they are far beyond what public sector funds can (or should) pay. Why are these salaries so high, you ask? Yeah, good question. There are many reasons – most of them having to do with a failure of pension and sovereign fund Boards to adequately resource their own operations. Indeed, by choosing to outsource almost everything, pensions and sovereigns decided to give enormous power to the private asset management businesses. And, like good capitalists, these private sector firms have done very well with that power. I don’t blame them. Even my friend 'Mr. Nice Guy' who’s considering a jump to the Rebel Alliance has a fair point; if someone is willing to pay him X and I’m suggesting he take X/3 or even X/4... for pretty much the same job... why would he do that? My arguments about “more sustainable finance” and “alignment of interests” are convincing... but not that convincing.

Anyway, perhaps this random discussion helps to explain why I’ve been on this human resources / frontier finance kick over the past few years. Think of it this way: If we are actually going to find a way to level the investment playing field (between asset owners and asset managers), we will have to convince some brilliant people to come over to the rebel alliance. So, what’s the best way to do that?

I’ve already written a lot on this topic, but the over-arching question that motivated this specific post is as follows: Is it wise for large public pensions and sovereign funds to set up offices in large financial centers in order to tap into the pools of specialized labor there? Or is it better to keep the fund outside of these financial centers in an attempt to attract talent out to the frontiers of finance? As you no doubt are aware, many of the best funds in the world have opted for the former (e.g., CPPIB, OTPP, GIC, NBIM, CIC, etc. all have foreign offices), but I actually think the latter option is better...

The pension fund that sets up shop in a financial center is, in effect, competing head-to-head for talent with the highest paying private sector companies in the world. Yes, there will be deeper pools of talent in NYC and London, but can these public funds really compensate people on the same levels as the private sector? If not, will they get second-rate employees? What will turnover be like?

Conversely, the funds that stay out on the frontier are making another type of play: They are betting that there are some very smart people that don’t want to set up their lives in the large financial centers; they are betting that there are individuals who want to “come home” or “escape the rat race” and would be willing to work at a discount in order to do so (in places like Olympia or Juneau or Auckland). This approach may require the fund to be thoughtful in developing its investment strategy – as in, the strategy will need to reflect the nature of the talent in the organization rather than the organization looking for talent to fit a strategy. But I think this is a more realistic approach.

In sum, I think a public pension fund that goes to Wall Street or The City of London will have to find a way to pay employees millions upon millions as well as set up incentive structures that match the private sector (i.e., carry). For 99% of the funds of the world... that ain’t happening. I'd like it to happen, but I need to be realistic. For example, here is one of the big take-aways from one of my recent research papers:

“The Board has to understand the importance of people and be willing to offer compensation packages sufficient to get the talent required, keeping in mind that even generous compensation paid to internal teams will almost always be dwarfed by the compensation routinely paid to external managers.”

So my advice for funds looking to attract some super smart people is to set up shop far away from Wall Street and then look for creative ways to attract brilliant people to you.The reality is that these public pension and sovereign funds can't expect to compete with the private salaries, so they need to find a niche and focus on being excellent in that niche...