The Collaborative Investment Model

The Collaborative Investment Model

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  • Facing diminishing returns of traditional asset classes, investors are looking to increase their allocation to alternative strategies in order to achieve better returns and risk diversification.
  • Sourcing good investment opportunities in the alternative space requires, however, significant resources in terms of research and operations.
  • The collaborative investment model allows to reach out to alternative investment opportunities by pooling the intelligence, resources and assets of several investors.
  • This community of asset owners must be run by a consortium manager that enables an efficient collaboration between them for the projects: sourcing of opportunities, manager selection, fund structuring, fee negotiation, monitoring, etc.

Asset owners are currently facing low expected returns and an increased correlation between traditional asset classes. Against this backdrop, they are increasingly favouring alternative strategies to meet their return targets and achieve better risk diversification. These encompass private equity, private credit, real estate, real assets, venture capital, absolute return and other niche strategies.

While so far living up to the promise of higher and less correlated returns, alternative investments have confronted investors with a new set of challenges, thereby undermining their ability to efficiently deploy capital in the alternative space. Sourcing good investment opportunities and conducting an efficient due diligence often turn out to be costly and time-consuming processes and require large in-house resources that many investors do not have on their own. Obtaining favourable terms — most notably regarding fees, capacity and governance — has also proven particularly challenging for investors.
Many investors have reached out to funds of funds or alternative investment advisors. However, the real value brought to investors, the implementation of a second layer of fees that depletes returns and the lack of transparency and of knowledge transfer to investors, are significant drawbacks which leave room for a more efficient solution.

As the challenges faced by investors in the alternative industry are often due to the lack of adequate resources, an optimal solution is for several investors to team up by pooling expertise, resources and capital. This group of investors must be coordinated by a consortium manager[1] (itself contributing its own resources) that enables an efficient collaboration between investors, negotiates the most favourable terms on their behalf — at a fraction of the costs of standard funds of funds or advisors, and with much larger benefits.

Leveraging the insights and past investment experiences of a large and diverse pool of knowledgeable investors — single-family offices, insurers, pension funds — may largely improve the consortium’s ability to source promising investment opportunities and conduct a more efficient and thorough due diligence. In addition, the pooling of assets will typically translate into better terms, ranging from lower fees, better capacity, co-investment opportunities, best-in-class reporting, an enhanced access to research and a better governance with the consortium typically obtaining a board representation.

However, managing to unleash the potential of the investor consortium is all but a foregone conclusion. As it has yet to become a major trend, the new collaborative approach is bound to deal with a set of hurdles. The main challenges are to ensure an efficient and seamless communication and sharing of information between the investors, from the sourcing of investment opportunities and the due diligence process to the post-investment oversight. The structuring of the investments should also accommodate the several regulation-related hurdles, for instance the various fiscal and legal statuses of investors. The consortium manager will precisely support the resolution of these issues with the additional challenge of determining a pricing model that ensures an alignment of interest with the investors.

While the advantages of the collaborative investment model are evident, the key to successfully harnessing them lies in the quality and the diversity of the investor consortium, as well as the commitment of the consortium manager who coordinates the projects efficiently and proposes an appropriate economic model.

[1] Consortium Manager: independent entity responsible for building and managing a community of asset owners willing to share intelligence and resources in order to enhance their investment process in alternative investments. Its role includes managing the community of asset owners (meetings, working groups, committees, etc.) as well as supporting the investment process (sourcing, due diligence, etc.) and the structuring and monitoring of the investments.

Institutional Investors and the Energy Transition

Institutional Investors and the Energy Transition

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On December 12th, 2017, local, regional and national leaders met in Paris for the One Planet Summit to renew the commitments made two years earlier at the Paris Climate Conference. The goal for French President Emmanuel Macron, the organiser of the summit, was clear: show that despite President Donald Trump’s unilateral withdrawal from the Paris Agreement, the world remained united in its goal to curb global warming. In other words, make clear that energy transition is now globally embraced and irreversible.

The concept of energy transition refers to a global structural change in the production of goods and services, and in energy consumption. It is typically seen as a three-pronged process, involving curbing fossil fuel consumption, expanding the use of low-carbon energies and improving energetic efficiency. The goal is to reduce greenhouse gas emissions and limit global warming, with a target set at 2°C above preindustrial levels.

Accordingly, state regulation — hard law — is steadily increasing to deliver on these commitments. Most developed states have implemented carbon pricing systems and new standards that are revamping entire sectors, from real estate to transportation. Even emerging countries, such as India and China, now view the energy transition as a strategic priority and are fully committing to curbing carbon emissions and supporting green alternatives to fossil fuels.

The private sector too is setting up its own climate-related norms to supplement state regulation. Non-Governmental Organisations (NGOs) have been followed by an increasing number of prominent investors that have understood the vital role of involving finance in the energy transition. The Institutional Investors Group on Climate Change (IIGCC), launched in 2012, gathers 150 of the world’s most influential investors, including major asset managers such as BlackRock, insurers such as AXA and institutional investors such as CalPERS. It took an active part in the Paris Climate Agreement and the One Planet Summit. The latter summit saw the launch of the Climate Action 100+ Coalition, whose members manage over $30 trillion in assets. The Coalition has pledged to disclose a list of the public companies that are most reluctant to embrace the energy transition and openly advise against investing in them. Given the clout of the Climate Action 100+ Coalition, such soft law is likely to prove coercive, and will force institutional investors to abide by it.

As the effects of global warming are becoming increasingly blatant and the commitment from both public authorities and the private sector is growing, investors should acknowledge that the trend of expanding regulation is irreversible. The main risk for institutional investors is now to remain passive and not adapt to this new standard. Indeed, their portfolios are becoming vulnerable to a change in regulation that will swiftly decrease the value of non-climate-friendly assets.

The first step for investors is thus to acknowledge the rise of non-financial, climate-related risks. Regulation is the key factor as it is set to impact all asset classes in a portfolio — stocks in polluting companies, commodities, energy-inefficient real estate, etc. The risks of ignoring the energy transition, however, are much broader. As scientists now agree that climate change has entailed a rise in natural catastrophes such as floods and hurricanes, investments in infrastructures and insurance-linked securities are becoming increasingly prone to physical risks. In addition, as customers, stakeholders and potential employees are more aware of the effects of global warming, there is a growing reputation risk in ignoring the energy transition. This becomes particularly significant as millennials are more likely than their predecessors to choose their employer depending on the sense of purpose they feel they are given.

Adapting to the energy transition requires that investors assess their portfolio’s exposure to climate-related risks. In this regard, investors can rely on the increasing availability of data and benchmarks. Granted, specialised carbon rating is still a nascent industry and climate still accounts for a minor portion of global ratings by entrenched financial rating agencies. This is largely due to the fact that the horizon for financial risks is much shorter than that for climate-related risks — what former Governor of the Bank of England Mark Carney calls the tragedy of the horizon. However, a rising climate awareness and increasing availability of carbon related data are bringing about steady change in the industry. Assessing the exposure allows investors to mitigate risks by underweighting the riskiest assets in their portfolios, and in some cases fully divesting from entire sectors.

As a result, investors should anticipate future regulation by adapting their strategies, i.e. setting up climate-friendly portfolios. This will not only largely mitigate climate-related risk, but also provide new opportunities in expanding, climate-friendly sectors. Renewable energies, energy efficiency and new energy vehicles (NEVs) are the sectors that benefit most from the energy transition. In this regard, investment opportunities span across all asset classes. Fixed income securities are witnessing the emergence of “Green Bonds,” while equity in a rising number of start-ups has the potential for high returns. Finally, investments in infrastructure are benefiting from the increasing commitment of public authorities, most notably through public-private partnerships (PPPs).

Against the backdrop of increasing climate risks, investors have much to lose in refusing to adapt to the new standard. Conversely, given the swift rise of climate-friendly sectors that are revamping the global economy, they have much to gain by fully committing to the energy transition.

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