2. Trends in Direct Investment: A Historical Perspective
The development of direct investing is best understood within the broader context of the development of institutional investing and associated advances in portfolio risk management. history shows that direct investment is not a new approach and it provides insight into why institutions now delegate much of their investment activities to asset managers.
Most institutions turned to specialist asset managers to help them invest, driving growth in private equity during the 1980s and the hedge fund industry in the 1990s.
In the early days of investing, investments were made directly out of necessity. From the 12th to 18th centuries, capital markets developed gradually while insurance, government bond trading, equity issuance and developments in mathematics joined to create modern capital markets and early financial institutions. The Dutch East India Company issued the first continuously traded equity in 1602.
Collective investment vehicles developed later, starting with the first closed-end funds offered in Great Britain and France in the 1880s, until the emergence of modern, liquid open-end funds in the 1920s. Alongside the development of the financial markets came the development of specialist branches of financial services, starting with insurance and pensions, followed by asset management and, most recently, the growth of sovereign wealth funds.8
The story of direct investing emerges in five phases, summarised in Figure 4.