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Direct Investment 2.0: Pension Funds Move Into Underwriting

Striving for cost-reduction and revenue-generation, pension funds should consider entering the investment banking world.

A little over a year ago I wrote a "blue sky" post about the potential for pension funds to step into banks' shoes in some new and creative ways, even extending themselves all the way into the offices of corporate CFOs and CEOs. As I saw it, pensions and sovereign funds have the capacity to forge deep relationships with companies over the long term, which could yield proprietary and potentially lucrative deal flow across a range of asset classes (equity, fixed-income, project finance, infrastructure, and even property). This is "Direct Investing 2.0;" it’s all about long-term pools of capital working their way onto the speed dials of corporate officers. In a sense, this approach takes the style of direct investing practiced by the Canadian pension funds and removes yet another layer of intermediaries (hence 2.0) — the bankers. 

Is this crazy talk? No. Can pension funds really ever hope to take on this sort of role? Yes. In fact, some already are.

Everybody reading this undoubtedly saw that AustralianSuper, the Abu Dhabi Investment Authority and Transurban came together to buy the Queensland Motorway. Yeah? But did you see that AussieSuper also acted as a sub-underwriter on the Transurban equity offering? Well it did.

Let’s pause for a moment to enjoy this. A pension fund just disintermediated an investment bank. Soak that in for a second... Mmm.

To be clear, this isn’t the first time a pension fund has done this sort of thing. Recall something the CIO of Tesco Pension Investment recently said, "Pension funds are the new banks. Everyone sees us as long-term lenders, and that is great. I’m happy to participate. We are the new banks, good banks potentially." Indeed.

And I think that’s a very exciting prospect, which is why I’ve gotten so interested in this space and have written on direct lending and originally did a post over a year ago on Direct Investment 2.0. There’s tons of potential opportunity here to generate returns in creative ways.

So, to all the big institutional investors in the world, why not consider fostering deeper relationships with companies? You may have to build a sophisticated in-house team as well as break down organizational silos, so that all asset classes can connect into a given CFO’s office, but isn’t it worth it? Of course it is. The underwriting fee AussieSuper likely earned on the Transurban deal would be enough to cover numerous in-house employees.

Anyway, it’s great to see the AussieSuper deal, as it’s more validation that a direct relationship between a company and a pension fund is both possible and beneficial. And now that AussieSuper has demonstrated its ability to do these sorts of deals, no doubt we’ll see more of them. CFOs everywhere will be putting the Australian Giant on their speed dial.

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