It’s pouring rain here in Silicon Valley, so I’ll no doubt be doing a lot of reading over the weekend. (Actually, that’s not quite right. I’ll be doing a lot of reading when I’m not trying to entertain an angry two-year old that’s been cooped up in the house all day playing ‘destroy dad’s awesome Lego towers.’ What’s he got against my Lego towers?) Anyway, I’ve got two solid papers for those of you who will actually find time to read. Both are a bit old but highly relevant to some of the trends and themes along the Avenue of Giants these days:
First, Danyelle Guyatt’s 2008 paper entitled “Pension Collaboration: Strength in Numbers” is quite interesting. It develops an eight-step framework designed to encourage collaborative initiatives among pensions and their agents. I’ve been writing about pension fund collaboration for a while (see here and here for some recent stuff), but for some reason I hadn’t come across this paper before today. (That’s weak, I know. Sorry.) Anyway, Guyatt seems more interested in effecting change through collaborative initiatives such as the Carbon Disclosure Project (CDP), the Council of Institutional Investors (CII) and the Enhanced Analytics Initiative (EAI). While that’s interesting, I’m more focused on the peer-to-peer initiatives around co-investing. Notwithstanding, I could see the framework developed in this paper being applied in different sorts of collaborative initiatives. Check it out.
Second, earlier this week I flagged up some new research that shows that PE returns are solid...but really only if you can get into a top quartile fund. For the rest, PE probably isn’t worth the high costs. With this insight in mind, I thought I’d direct you to the paper by Antoinette Schoar, Wan Wongsunwai, and Josh Lerner entitled “Smart Institutions, Foolish Choices?: The Limited Partner Performance Puzzle.” It offers some explanations as to why some (most) institutional investors end up investing in sub-par private equity GPs. Here’s a blurb:
“Corporate pension funds and advisors are more likely to reinvest if the current fund had high performance, but this often does not translate into higher future performance. These findings suggest that endowments proactively use the information they gain as inside investors to improve their investment decisions, while other LPs seem less willing or able to use this information.”
In short, the investors who rely on intermediaries to help them make investment decisions tend to pick worse managers than those who use their insider knowledge and skills to hire and fire. Fascinating.
Enjoy your weekend.
