The World Economic Forum is pleased to release Direct Investing by Institutional Investors: Implications for Investors and Policy-Makers, which examines the trend towards direct investing in illiquid assets by asset owners, such as pension funds, sovereign wealth funds, endowments, family offices and insurers.
While direct investing – an asset owner making the decision to take part in a specific investment – is not new, a number of large direct transactions in private equity and infrastructure since the financial crisis, for instance, have caught the investment community’s attention and sparked speculation about the amount of direct investing, its growth trajectory and the likelihood of the trend reshaping institutional investing over the next few years. Direct investing can be done through various models – independently, in partnership with other investors or through co-investments. The focus of this report, as it reflects what could have the most impact for asset owners, policy-makers and society as a whole, is on direct investments in illiquid assets such as private equity, infrastructure and real estate, as implemented through these models. The report highlights the motivations for and constraints limiting direct investments, provides an overview of direct investing today, presents predictions on its growth and explores the implications for investors and policy-makers.
As long-term investors, asset owners such as pension funds and sovereign wealth funds play an important role in the financial markets, for instance by helping to stabilize markets and funding long-term corporate growth, infrastructure and urban development. Thus, changes to the models for how asset owners allocate long-term capital are noteworthy for companies, governments and developers potentially receiving capital; for asset owners and asset managers; and for society.
This report on direct investing is the third in a broader series by the Forum on long-term investing, defined as “investing with the expectation of holding an asset for an indefinite period of time by an investor with the capability to do so”.1 The inaugural report in this series, The Future of Long-term Investing,2 explores who long-term investors are, the constraints they face and the impact of the financial crisis on long-term investors. In that report’s section on long-term investing after the financial crisis, one area of focus was on how long-term investors have been rethinking their relationship with external fund managers, the focus of the current report.3 The second report, Measurement, Governance and Long-term Investing,4 looks at the relationship between an institutional investor’s governance framework and the metrics used to measure whether, as a long-term investor, it is on track towards its goals. In the discussion on the implications for asset owners in this current report, an institutional investor’s governance framework is highlighted as a key variable for determining whether direct investing is an appropriate investment strategy. The Measurement, Governance and Long-term Investing report lays out much of what constitutes a highly effective governance framework and the challenges involved with creating it.5
This report is the result of collaboration between the World Economic Forum and Oliver Wyman, with key industry practitioners, policy-makers and advisers participating in interviews and workshops. Throughout this process, intellectual stewardship and guidance were provided by an actively engaged steering committee and advisory committee.
Head of Investors Industries
World Economic Forum USA
Head of Institutional Investors
World Economic Forum USA