Are Strategic Partnerships Bad for Strategic Partners — and Everyone Else?

What our industry so facilely calls “strategic partnerships” are neither strategic nor partnerships.

These relationships are simply bloated iterations of the entrenched transaction-based arrangements between an asset owner and an asset manager. 

They are a quid pro quo in which a large asset owner gives a large asset manager a large pile of rather sticky money, and the asset manager promises the investor returns and financial and legal terms better than what’s available on its off-the-rack products.

This transaction is artfully wrapped in the veneer of exclusive benefits like “an extension of staff” and “knowledge transfer.”

Such benefits are, by and large, imagined. 

I recently spoke with asset owners who were themselves strategic partners. All generally agreed that with the exception of better terms, the promised investment and exclusive benefits were not realized in a materially meaningful way. A research paper by Stanford University’s Ashby Monk and Quebec’s Public Sector Pension Investment Board’s Eduard van Gelderen — two gentlemen I count as friends — on strategic partnerships similarly finds that “the partnership has not delivered on the main objectives of generating better investment performance and/or achiev[ing] lower costs.”

And while better performance could be difficult to quantify, the promise of social benefits is clearly unfulfilled: “Extension of staff” reduces to minor encroachments on a manager’s human resources — and only if they advance the manager’s self-interests or are insignificant in their scope; “knowledge transfer” reduces to additional private conference calls or meetings and “custom” white papers. 

These failures are the result of the intrinsic misalignment of interests between the “partners.” 

An allocator seeks better returns, better terms, and more access; a manager covets a large (typically greater than $1 billion) allocation from a brand-name client. 

While these are compatible goals, they are not shared goals. 

This is precisely what Monk and van Gelderen call “the inherent tension between the business models of commercial asset managers and not-for-profit” pension plans that makes a true partnership very difficult.

However, this tension exists only because of an allocator’s restrictive definition of its partner as “a multi-asset-class firm with global capabilities and sizable assets” or “a well-resourced manager that builds its business around client solutions.” 

This size requirement acts as a negative selection bias: The manager concedes on fees and terms to achieve its goal of gathering a large amount of committed capital from name-brand clients — but has little incentive to share too much information or commit too many resources once it has the assets under management. From a purely performance perspective, asset gathering generally imperils a manager’s ability to fulfill its promise of robust returns, even when given “unconstrained” mandates.

The failure of these partnerships not only impacts the direct counterparties. It also adversely impacts the manager’s nonstrategic partners (and would “insignificant partners” be a better term?).

If you are such a client, you pay a higher fee and get none of the exclusive benefits. 

Your sole reason for allocating capital to the manager is for its skill and the alpha it produces.

Given how incredibly difficult active management is, you would naturally expect the manager to be singularly focused on delivering alpha. 

Yet the manager’s commitment to strategic partnerships lessens its chance of achieving investment excellence, as this commitment requires unfettered asset gathering and redirects the firm’s most critical resources (time, knowledge, people, and capital) away from alpha-generating activities and toward fulfilling the individual needs of its partners. By way of example, IPE describes the relationship between J.P. Morgan Asset Management and Teacher Retirement System of Texas as including “three summits per year, in which the solutions team is asked to present its thoughts on the current investment environment, individual asset classes, and current tactical asset allocation views”; “two collaborative research projects a year, in which the topics are determined by the trust [i.e., client]”; and a private conference call with your portfolio managers.

Be aware that your higher fees overtly encourage the manager’s commitment to asset gathering while subsidizing its discriminatory, white-gloves client service. 

Ask your manager to empirically demonstrate how its strategic partnership benefits you. And expect a very nonstrategic response. 

Yet despite my critique, I strongly believe that allocators can benefit from partnerships with external parties — if they are explicitly founded on a common goal.

Depending on the common goal, these relationships can offer the same benefits promised by ersatz strategic partnerships — better returns, better terms, and knowledge transfer for the allocator; capital, access to new resources, and new revenue for its partner — and more. Here are three archetypes of these reconfigured strategic partnerships:

  • Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension plan, partnered with Sony Computer Science Laboratories to explore how artificial intelligence could be used to create better investment outcomes — specifically, if deep learning could be used to “detect the investment style of managers from trading behavior data (trading items, timing, volume, unrealized gain and loss, etc.) collected daily by GPIF.” GPIF gets new, world-class technology and knowledge transfer; Sony gets domain knowledge, data, and a new, scalable use case.
  • The C$108 billion ($82 billion) Alberta Investment Management Company (AIMCo) formed a joint venture with Edmonton-based AI startup AltaML called AlphaLayer with the aim of: 1) using AI to improve AIMCo’s internal operational efficiencies and investment decision-making, and 2) commercializing some of the proofs of concept by selling the applications to other asset owners. AIMCo gets new, world-class technology and knowledge transfer; AltaML gets a world-class seed client, domain knowledge, and new, scalable use cases. Both get the opportunity to monetize the intellectual property through sales to externals.
  • Texas Tech University and Corrum Capital Management co-founded and collaborate on building a global platform to invest in trade-finance-related opportunities. Texas Tech gets the investment exposure and yield it wants with the transparency and governance structure it requires as well as knowledge transfer; Corrum gets knowledge transfer and a new, complementary, fee-based business seeded by a blue-chip client. Both participate in the upside growth of the platform resulting from external AUM and possible exits of the portfolio companies.

Independent of their specific intentions and designs, these exemplars share a single common trait: Each asset owner chose a nontraditional partner with a common goal. 

This is not a coincidence but rather a necessary condition for their success, and yet I would argue that no large asset owner could or would commit to such an explicit and formal alignment.

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