Outsourcing in the Alternative Investment Industry

In order to survive, all businesses and industries are constantly evolving to be in synch with the economy, meet the needs of investors, consumers and their employees and to improve their bottom line.  Being able to evolve is especially important n the Alternative Investment Industry and we have been seeing signs of this over the past 18 months.  Most recently, the trend of outsourcing investment management duties has been developing and gaining momentum particularly in the small and medium size Institutional Investors (predominantly Endowments and Foundations).  The trend to outsource to firms such as Perella Weinberg’s Agility unit or the new unit within TIAA-CREF lead by Scott Wise brings yet another change to the hiring arena of the Alternative Investment Industry.  

 It can be assumed these larger firms, such as TIAA-CREF, are creating these new business units because they are being approached by and seeing demand from the Endowments, Foundations and smaller Institutional Investors.   In many cases this demand is created by the high costs associated with staffing an Endowment’s investment management team. This is especially true when it is critical for the Endowments to allocate funds to Alternative Investment Strategies due to poor returns over the past few years.  The Endowments can no longer rely on conservative investments as a majority of their portfolio to preserve capital and generate little alpha.  They are discovering the need to hire specialists to lead them into Alternative Investments to enhance and diversify their portfolios.  The added and relatively high cost associated with hiring specialist is sending the Endowments and smaller Institutional Investors down the path of outsourcing their entire investment team.

Some argue these new Outsource Management Platforms provide the Endowment’s board greater fiduciary protection and assurance.   These business units spun out of large established firms have broader reach and recruiting ability and can ensure due diligence with all investments.   For example it is likely cost prohibitive for smaller Endowments or Foundations to have an Analyst on staff that has expertise in performing due diligence with both traditional and non-traditional investments.  As Endowments begin to diversify their portfolios and hold stocks, bonds and alternative investment products such as Private Equity and Hedge Fund investments; using an outsourcing company that can maintain multiple Due Diligence Specialists allows these investors to be assured all of their investments, particularly the higher risk ones, are receiving the proper and close examination required.  The Platform Model also brings with it a greater ability to manage the investors’ entire portfolio while continuously looking to source new and creative investment strategies which produce the needed alpha while maintaining as low a risk profile as possible.

But regardless of the exact reasoning behind this evolution, the bottom line is that it is the current trend and it is appears to be a very good trend for experienced Alternative Investment professionals.  The new platforms should ensure relatively higher pay for Investment professionals when compared to compensation offered at the Endowments and Foundations.   Although some will argue the work-life balance offered at the endowments made up for the lower pay, the ability to gain experience on a wider range of specialized strategies at the Outsourcing Platforms will interest and benefit professionals.

In addition to increasing compensation for these professionals, the new platforms should also bring about increased employment opportunities for Alternative Investment professionals - especially for those who are extremely specialized in their field.  The platforms should create additional capital opportunities for many single strategies firms both large and small which is probably one of the reasons we have seen an increase in marketing roles on PrivateEquityJobs.com over the last few weeks.  I also anticipate these Outsourcing Platforms will become the next group of seed investors for new funds as many professionals believe that the greatest returns in the Alternative Investment class happen when funds are smaller in asset size.

The Endowments and Foundations have unfortunately received a double whammy over the past two years.  With both their donations and investments down, they have been forced to make changes in order to survive.  No longer will their typical conservative portfolio allow them to create the returns required to service their obligations without taking funds from principal.  Fortunately, these firms have been proactive in meeting the economic environment and are finding new Alternative Strategies which can produce alpha and dividend as well.  In the meantime, it seems their changes may also improve the compensation levels and perhaps create some additional hiring for this market.

© 2008 NyamiNyami Holdings, LLC