Why Institutional Investors Who Go Direct Need to Think About Disruption

Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

According to data from the Sovereign Wealth Fund Transaction Database (SWFTD), the pace of direct investing remains positive for both larger wealth funds and public pensions as allocating capital straight into companies and assets enables the possibility of greater control. In addition, the benefits of co-investing entails lower fees and expanding access to information asymmetry. Asset owners, such as life insurance companies or sovereign investors, can have a level of input on how the company or property is operated, financed and eventually disposed. All of this sounds fantastic at first glance. However, direct investing requires considerable amount of upfront dollars, long-term buy-in from appropriate stakeholders, such as the board of directors, and the wherewithal to bear risk in concentrated, illiquid positions. Typically, the successful asset owners in direct investing are able to define and understand the key return drivers of the particular investment.

Before parking down hundreds of millions on an asset there is a question: how will disruption affect my large purchase?

In addition, as more public funds go direct, the competition for companies and assets increases – cue bubbles. Discovering high-quality investments, identifying the value edge and goals of realistic upside are tantamount, requiring at minimum talented personnel and financial resources. The competitive bidding process could leave pensions with inadequate resources on the shorter end of the stick. Also, the ongoing management of the company or property requires a bit of executive expertise. When does the asset owner refinance or decide to divest from the investment?

The Effects of Disruption

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