A growing number of institutional investors, persistent in their desire to disintermediate and align interests with asset managers, are turning away from Wall Street and are instead looking to one another for assistance. These direct investors are hoping to overcome the loss of agglomeration economies embedded within traditional financial centers by leveraging a new set of network economies through collaboration and co-investment.
The over-arching question, however, is how these funds can actively collaborate and co-invest to actually take advantage of these network effects. This can be quite challenging, as the differing return objectives and investment philosophies, not to mention the basic challenge of geography, all complicate matters.
Drawing on a specific case study of collaboration and the qualitative data collected from over 20 on-site case studies of public pension funds and sovereign wealth funds around the world, this paper offers some practical insight as to how institutional investors can structure platforms and vehicles that will align interests and facilitate co-investment.
The Cleantech Syndicate (“The Syndicate”) is a group comprised of 12 family offices, representing roughly $40 billion in capital. Conceived of in June 2010 by Black Coral Capital, a family office, and McNally Capital, a Merchant Bank to family offices, the Syndicate’s stated mission is to assemble a select group of family offices to “pool expertise, resources and capital to invest directly in clean technology and alternative energy companies”. It is a virtual private equity firm with all aspects of the value chain and investment stages covered, with family offices offering staff to act as ‘partners’ in the virtual PE firm. There are 30 total team members dedicated to the Syndicate, including 17 “institutional quality” clean tech investment professionals. The group has approximately $1.5 billion to deploy into this asset class, which makes the Syndicate among the world’s largest players in this niche market. The over-arching objective of the Syndicate is simple: transactions. And, over the last twelve months, there have been approximately ten deals closed, with two of those deals having multiple families represented.
By coming together, the Syndicate solved several problems for its members:
- Deal flow: The Syndicate is a very large investor in this niche market. Most cleantech investment opportunities in North America (and the world) come through the inboxes of either the Syndicate Administrator (McNally Capital) or one of the families. For example, Syndicate members saw, in rough numbers, 1500 deals last year.
- Scale in Capital Raising: Clean tech investments require a significant commitment of capital over the long term to be successful. Raising this capital can be a challenge, but working together in a Syndicate makes this much easier.
- Expertise: Syndicate members have, in most cases, already built successful businesses in the marketplace, which means they offer considerable insights into different segments of the industry. The members exchange investment ideas and assist on due diligence and vetting as well as offer advice on portfolio companies.
- Post-close: Syndicate members are intent on creating value beyond the transaction. Members have indicated that the Syndicate has become invaluable for identifying potential customers or suppliers for portfolio companies. In short, the long-term goal of the Syndicate is to create value beyond the deal; in the words of one member, “That’s the magic dust.”
- Due Diligence: One important function the Syndicate plays is providing advice that prevents members from doing a “bad” deal. This is hard to quantify but valuable.
- Costs: Access to third-party industry reports and attendance at cleantech conferences become time and cost efficient when the benefits are spread across a larger group.
- Relationships: The Syndicate offers family offices a unique platform for developing relationships among the members and external partners. The Syndicate can serve as an outward facing organization that offers external partners an easy point of access through which to seek (or bring) opportunities.
In short, the Syndicate is all about institutions coming together to collaborate (e.g., sharing content, knowledge and deal flow) and co-investment (e.g., sharing capital and risk).
Bachher, Jagdeep Singh and Monk, Ashby H. B., Platforms and Vehicles for Institutional Co-Investing (November 12, 2012). Available at SSRN