The Sovereign Alliance

You’re a publicly sponsored institutional investor out on the ‘frontiers of finance’ looking to do alternative investments globally and on a direct basis. Why? You’re fed up paying the 2 and 20 fees to asset managers and getting little in return. But you’ve come to see how hard this policy actually is to implement in practice. In short, your frontier status combined with your public status (e.g. ADIA, AIMCo, APFC, NBIM, CalPERS, NYCERS, APG, CIC, etc.) make it extremely difficult to attract, retain and motivate the sophisticated talent you need to successfully run these in-house operations. So what do you do? You try to collaborate with other institutions that think similarly. You try to work together as partners rather than against each other as competitors to source, diligence and monitor transactions. You cover each others’ backs and minimize the costs, while maximizing returns.

You really have to admit, this is an elegant solution to an intractable problem. I envision a group of sovereign funds or pension funds coming together in an alliance in much the same way airlines have done through OneWorld or Star Alliance; they’d compete in some areas but agree to collaborate in areas where there is mutual benefit. In the case of the airlines, the partners focus on different geographic territories, so it makes sense to collaborate instead of trying to build an organization that can cover the whole planet. So they code-share and link rewards travel, which gives their local operations a global reach. Why can’t institutional investors collaborate in a similar manner? Why doesn’t the IFSWF in effect become the Star Alliance of sovereign funds? The Sovereign Alliance!

Anyway, this is why it’s so much fun being an academic: I get to write stuff that makes absolute sense intuitively but, in practice, is probably impossible to implement. The truth is this: It’s really, really hard for institutional investors to collaborate. It’s all about finding like-minded individuals within like-minded institutions that are willing to accept “No” 10-20 times to co-investment opportunities before they hear a single “Yes”. It’s about developing relationships, trust, and all of those things that are extremely hard to formalize and institutionalize in legally binding ‘Alliances’.

In fact, some funds and people are trying desperately to formalize and institutionalize collaboration right now, and I can guarantee you that all those individuals will tell you the same thing: It’s really hard. And when you add lawyers into the mix, collaboration moves somewhere between really hard and impossible.

Nonetheless, I remain absolutely and utterly convinced of the logic of collaboration. And I also think it’s worth the effort to find ways to work together. Here’s hoping that a new ‘Sovereign Alliance’ or ‘OneWealthFund’ will be ‘deal-sharing’ in the coming decade.