The Sovereign Alliance

Ashby Monk

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.

5 Responses to “The Sovereign Alliance”

  1. 1 Victoria Barbary November 2, 2011 at 11:21 am

    Hey Ash, I looked at this very think earlier in the year, and have kept a weather eye out for it over the last few months after a SWF executive I was on a panel with suggested that SWFs were much more coordinated than I was giving them credit for.

    The conclusions to the analysis I did was that actually there is a pretty impressive amount of collaboration between SWFs, and while it remains small on the grand scale of things, when it comes to major IPOs (AgBank), sales (BTG Pactual, Cheasapeake Energy etc.), and JVs (Fajr Capital) SWFs do collaborate, and that I don’t think that this is entirely coincidental. I actually made the point that this also extended to the North American pension funds who often cropped up in such groupings, and added valuable experience and developed market involvement.

  2. 2 Ashby Monk November 2, 2011 at 11:25 am

    Fair point. But let’s see if we can find one instance where this collaboration is “formal” and not “ad hoc”. THAT will be a big development, in my view. Otherwise it’s just deal by deal based on personal relationships. I agree with you that is happening. But how do you move beyond that? That’s what I was getting at above. The Alliance idea. Thanks for the comment! Ash

  3. 3 Victoria Barbary November 2, 2011 at 11:28 am

    Do you not think that the politics of that would be too awkward? To avoid the accusations of GCC funds or Asian funds etc gaining political advantage from an investment, you’d have to have the “right” blend of geographies and political regimes represented in any Alliance investment, which could be hard.

    An alternative could be a “Fund of Sovereign Wealth Funds” to undertake investments on their behalf….

  4. 4 Ashby Monk November 2, 2011 at 11:30 am

    I think now you’re seeing my point :)

  1. 1 What’s Impeding Collaboration and Cooperation? « Oxford SWF Project Trackback on December 19, 2011 at 12:20 pm

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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