As I sat slurping frozen drinks and directing beach traffic around a highly mobile 14 month old boy last week, I actually managed to have an academic epiphany: Most of the subjects that really fascinate me about sovereign funds (and their various institutional cousins) have to do with the unique challenges that these funds face in achieving their long-term objectives. I know that sounds a bit boring, but let me explain.
The center of gravity for global finance is moving from traditional centers, such as London, New York and Tokyo, to new locations, such as Abu Dhabi, Astana, Auckland, Baku, Beijing, Edmonton, Juneau, Lagos, Moscow, Oslo, Santiago, Sao Paolo, Singapore, and Seoul (among others). These are the frontier cities where financial capital will increasingly converge, and flow from, in the coming decades. And, as a result, cities and states without any past claims to the global finance industry are becoming some of the most powerful players in finance today. This, friends, is ‘Frontier Finance’ — where the ultimate investment deciders are increasingly located in places not known for their investment acumen.
In my view, there are some very difficult challenges associated with running a modern financial institution in these locations. For example:
- How do you set up a world class institutional investor when finance has been something of an industrial afterthought in your country or city?
- How do you design and tailor the governance structures of a fund to the specific needs, constraints and attributes of the sponsoring jurisdiction?
- Given your lack of local financial expertise, do you simply outsource your asset management to New York and London?
- Do you attempt to move the assets in-house and make the investment decisions yourself?
- How do you develop and recruit the necessary talent needed to run a modern financial institution?
- Should you reach out to other like-minded funds for collaboration, cooperation and co-investment?
These are the questions (and there are many more) that I hope to be researching, answering and advising on in the coming year(s).
Obviously, I need to mention that being out on the frontier isn’t all bad, as there are plenty of opportunities for innovation and reflection that can lead to returns. For example, it hasn’t hurt Warren Buffet to be in Omaha. The real question, however, is whether Buffet’s example can be replicated in Edmonton or Auckland. I think it can. And I’m fairly certain that Leo de Bever and Adrian Orr would agree. But in order to achieve this lofty goal, we have to be really creative and forward thinking; there are too many intractable challenges to think otherwise. That’s what gets me out of bed in the morning (and distracts me from my vacation).
Anyway, the dramatic rise of sovereign funds has permanently changed the geography of finance. And, personally, I’m really quite enthusiastic to think about how these funds can best meet their objectives while operating on the frontiers of finance.