Ventures in Asset Management

Yesterday, I reflected on the need for new venture capital vehicles to create a better alignment of interests between asset managers and asset owners. I then heaped a bunch of praise on the Wellcome Trust for having the courage (and capability) to seed just such a vehicle and offer a wonderful example for other institutional investors that might like to consider a similar policy.

Today, however, I’m coming back down to earth (at least temporarily).

Given the seemingly widespread nature of agency problems in the investment business, you’d think institutional investors would routinely seed managers or at least back upstart funds that better match the needs of LPs with GPs. But you’d be wrong. Most pension and sovereign funds are restricted by their regulation, governance and even management as to what they can and cannot do in a given asset class. Winning a new mandate often requires a manager to jump through a variety of hoops seemingly designed explicitly to keep upstart funds out (e.g., firm rules on performance and track record). The truth is, then, that it is very challenging for institutional investors to seed new managers... just as it is very challenging for new asset managers to secure cornerstone commitments from institutional investors.

And, as a result, the institutional field of finance provides established players with a pretty hefty barrier to entry. And that’s not good.

This is why I continue to be a fan of emerging manager (EM) programs. I share David Swensen’s view that the best asset managers tend to be small, entrepreneurial and independent, and I think these EM policies offer a very useful way to help bring these sorts of asset managers to market. As I’ve said before, these emerging manager programs often get a bad rap among mainstream finance professionals (i.e., white dudes) for being affirmative action programs or handouts to minorities. But I don’t see it that way... the real point of these programs is to disrupt the cozy, and I’d go so far as to say unfairly biased, treatment that large asset managers receive from pension funds due to the latter’s governance and institutional deficiencies. If done right, a good EM program should look and feel like 'venture capital of asset management'. And the performance on a risk-adjusted basis should be solid.

Anyway, as I said, yesterday’s post heaped praise on the Wellcome Trust for its seeding of an evergreen VC business. But for today’s post I thought I’d return to the godfather of EM programs: CalPERS. As Private Equity International recently pointed out, “No single institution has been as important to the growth of the emerging manager segment as the California Public Employees’ Retirement System.” As a result, I wanted to direct your attention to a new report recently released by CalPERS describing its EM policy: “Emerging Manager Five-Year Plan: Pathway to the Future”. Here are a few blurbs worth reading:

“CalPERS has a legacy of leadership and innovation in emerging manager investment strategies. We have been investing with emerging managers directly and through fund of funds for over 20 years. We are proud to support the Toigo Foundation and the Altura Emerging Manager Data Base. With our new total fund approach coordinating emerging manager program reporting through the newly created Targeted Investment Programs, we are continuing our commitment to engage with the emerging manager stakeholder community, strengthen relationships with emerging managers and improve implementation of emerging manager investment strategies

Our objective for investing in EM programs is to generate appropriate risk adjusted investment returns by identifying early stage funds with strong potential for success; accessing unique investment opportunities that may otherwise be overlooked; and cultivating the next generation of external portfolio management talent. The ultimate measure of success for our EM programs is investment performance against benchmark, and to date, performance against this metric has been mixed.”

I’m not going to go through the whole report; you can download and read it here. But I will mention that this five-year plan looks solid. As CalPERs says, “This Five-Year Plan represents a significant commitment of resources by CalPERS to identify, source, develop the capabilities of and communicate with emerging managers.” Indeed. And I think that’s a good thing for CalPERS and for financial services more generally. Why?

Because it’s through this sort of program that we’ll hopefully get the innovative vehicles and structures LPs require to allocate more of their capital to all important asset classes like venture capital and infrastructure.