Sovereigns Seeding Managers

story_images_new-growthIn the wake of the financial crisis, institutional investors have been rethinking the way they access markets. Frustrated with an obvious misalignment of interests and seemingly extravagant fees, the world’s biggest investors are increasingly looking to deploy assets in new and innovative ways. Readers of this blog are no doubt aware of the trend to move assets in-house, but there are other strategies to take note of as well. For example, some funds are trying to re-structure and change the nature of their external mandates, hoping to reduce fees or refocus external managers to prioritize their long-term interests. One such strategy that is increasingly popular is ‘seeding managers’.

Indeed, a growing number of institutional investors, and in particular sovereign funds, are seeking out talented, young asset managers — generally in the hedge fund space but there are other examples in infrastructure and private equity as well — with the purpose of seeding them with startup capital. The idea is to spot a rising star and extract concessions before the young star’s bargaining power becomes too strong. There are many new examples of this in both the public and private sectors, but I’ll give you one example to make it all a bit more tangible: APG’s IMQubator. APG’s seeding vehicle describes its raison d’être as follows: “IMQubator’s mission is to realize high absolute returns at low costs for our investors by investing in new and innovative investment managers.”

By setting up ‘arms length’ funds, institutional investors can try to get the benefit of superstar talent without having to actually locate those individuals within the walls of the organization. People that would never work for a pension or sovereign fund actually end up working for a pension or sovereign fund. And these individuals are outside the organization, which means they: 1) are totally free of political interference; 2) can be paid market rates; 3) can be located in financial centers; 4) can be easily fired if they underperform; and 5) do not spoil the culture of the public organization with their egomaniacal ways.

It’s really quite an interesting development: you’ve got large (oftentimes bureaucratic and public) institutional investors that are, in effect, launching new companies. Last I checked, this is a very hard thing to do, and I’m not sure I’d look to public pensions for brilliance in the area of venture capital. Anyway, the fact that these public funds are willing to incur these risks should give you some sense for how frustrated they all are with the current norms in the asset management community. Watch this space!

This post originally appeared on the Oxford SWF Project.