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Allocators and Managers Love Strategic Partnerships — But Only Managers Win

PSP investment chief Eduard van Gelderen and Stanford’s Ashby Monk interviewed over a dozen asset owners about their experiences with strategic partnerships. The results were mixed.

Few words send the institutional investing world into a tizzy as much as “strategic” and “partnership.”

Unfortunately, according to a new paper from the CIO of PSP Investments and the head of Stanford University’s Global Projects Center, much of the buzz is just that.

Although forming strategic partnerships has been touted as a way for asset owners to leverage relationships with external managers, the paper from PSP chief Eduard van Gelderen and Stanford’s Ashby Monk suggests that allocator-manager partnerships have been “tilted too far in favor of the traditional asset managers,” leaving asset owners with limited upside.

“Clearly, for the managers, these partnerships are attractive, as long-term investment management contracts mean less time and effort needed to fundraise,” van Gelderen and Monk wrote. “But for the new networking teams at pensions and sovereigns, they likely need to revert back to thinking through the types of knowledge they require and then go to the best sources – in terms of alignment, trust, cost, and so on – to secure it.” 

This conclusion was the result of interviews with 13 pension plans around the globe with combined assets under management of more than $2 trillion. All of the plans were “considered to be thought leaders” on the subject of strategic partnerships and some had established teams dedicated to building up their external networks, according to the paper.

“Each case study indicated that the new relationship teams emerged out of a realization that their organizations needed to generate high investment returns, but this is difficult to do without a well-developed external network,” the authors wrote.

[II Deep Dive: The Economic Value of Networking]

For this group of 13 pension funds, at least, the results of forming strategic partnerships with asset managers were mixed. Although “several asset owners expressed that they gained in terms of social capital,” their partnerships had not delivered in terms of generating better returns or lowering costs – especially within public markets.

“One interviewed asset owner made it very clear that its commitment to provide seed capital for its partner’s new products has led to very disappointing investment results, which clearly undermined the strategic nature of the partnership,” van Gelderen and Monk wrote.

In private markets, meanwhile, the authors said that asset owners have found success in working with partners to establish investment platforms, wherein they provide equity and are involved in determining the platform’s strategic direction. However, van Gelderen and Monk said the co-investment opportunities provided by strategic partnerships have been “disappointing, as the number and quality of opportunities has not met expectations.”

The interviewees did offer a few defenses for their less-than-satisfactory strategic partnerships: the managers’ track records were too short to measure their value-add; costs weren’t lower because allocators were getting more than the traditional asset management services; expectations for the partnership hadn’t been clearly communicated and may have been “too stretched” to begin with.

Based on these case studies, van Gelderen and Monk suggested that allocators need to be more thoughtful about what they need and expect from strategic partnerships – and seek out partners who can fulfill those requirements. Merely referring to a business partner as a strategic partner is “missing the point,” they added, noting that “both partners have to be very clear as to what both partners will contribute and how each partner will benefit.”

“Successful strategic partnerships will not emerge overnight,” van Gelderen and Monk concluded. “It requires c-suite support, dedication, cultural fit, trust, and an open and honest communication.”

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