Social Capital and Building an Institutional Investor's Collaborative Network

Abstract

One of the major trends over the past decade among Long-Term Investors (LTIs), such as pension funds and government funds, has been to move towards a more direct method of investing. The financial crisis of 2008-09 accelerated this ‘disintermediation’, in particular within long-term private market asset classes, where the drawbacks of short-termism and principal agent issues of using certain intermediaries were exposed with disastrous consequences. While disintermediation and in-sourcing offer an obvious path to ensuring a better alignment of interests, the large majority of institutional investors will not have the capabilities to in-source due to the high resource requirements. As such, they need to develop novel, and less resource intensive, mechanisms to overcome the barriers to efficient long-term investment and aligned access to private markets. In this paper, we suggest a networking strategy for institutional investors that may help them achieve their long-term investment objectives creatively. Specifically, we draw upon social capital theory to validate a strategy that involves asset owners comparing, collaborating and ultimately co-investing in private market assets. Such a strategy is central to the new ‘collaborative’ model of institutional investment being used by LTIs.

Keywords: Institutional investment, co-investment networks, private market investing, social capital theory