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Why SWFs Are Moving Closer to the Action

SWFs and public pension funds are setting up offices in cities around the world, moving their organizations into the markets they find appealing rather than waiting for intermediaries to come to them. Here’s why, and how, they’re going down this path…

Some institutional investors have recently decided to launch satellite offices in major international financial centers and/or regional commercial centers. Take, as examples, Khazanah’s new office in San Francisco, the CPPIB’s office in Hong Kong, AIMCo’s office in London, the CIC’s Toronto office, and Temasek’s offices in Chennai, Sao Paulo, Mexico City, and Hanoi, among others. A growing number of Giants today are expanding geographically, moving their organizations into the markets they find appealing rather than waiting for intermediaries to come to them.

What’s pushing this community of institutional investors beyond the safety of the home office out into the frontiers of finance, you ask? Good question. In fact, it's such a good question that I decided to write a paper about it.

In a recent working paper with Qais Al-Kharusi and Adam Dixon — entitled, "Getting Closer to the Action: Why Pension and Sovereign Funds are Expanding Geographically" — we argue that the move overseas is largely a function of three broad trends coming together at the same time:

1) A growing number of pension and sovereign funds are moving towards a more active role in the investment process. These Giants are taking a dynamic role in external manager selection and monitoring, or they are insourcing asset management functions that would traditionally be managed by external parties. In both cases, the investors are seeking to minimize agency costs and maximize net-of-fee investment returns by getting closer to the assets they are ultimately investing in.

2) There are a growing number of large institutional investors located far from the major international financial centers; we refer to this as ‘frontier finance.’ In large part, this phenomenon is due to the dramatic growth and emergence of SWFs, but there are also many large pensions, endowments and family offices that are likewise located far outside the traditional financial centers.

3) Many Giants are also increasing their commitment to new asset classes in developed and emerging markets. Some are shifting their portfolios to regions (e.g., emerging and frontier markets) and asset classes (e.g., private equity and real estate) that have greater return opportunities in what is increasingly viewed as a low-return environment.

The combination of these three trends gives rise to some geographic and organizational complexities for investors. As Qais, Adam and I argue:

“There is a group of institutional investors located in distant geographies (e.g., Abu Dhabi, Auckland, Edmonton, Juneau, Lagos, etc.) that are taking a more active role in the investment process (e.g., by developing in-house capabilities or through more active oversight of external managers) in new industries, assets and geographies. In large part, this is an attempt to better align interests across the investment production chain and re-root finance and investment back in the real economy. However, in the process of re-intermediating and re-organizing the investment management supply chain, these investors are facing a new set of challenges related to the execution of these new models.”

Indeed, accessing talent, local knowledge, and aligned investments becomes all the more complicated for innovative investors based in the frontiers that also happen to be looking to the frontiers for opportunities. And it’s this that has driven them to set up overseas offices; we refer to this as the geographic expansion of institutional investment. And as we see more and more Giants professionalizing their operations, I expect we'll see a growing number of SWFs and pensions expanding geographically.

And yet, this policy should also come with a health warning: Launching a satellite office can be a huge distraction for management and a waste of money if not properly thought through and executed. And that’s precisely why I wanted to write this paper. So go read it and send me a note if you have any feedback. I'd love to hear it.

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