The Eagerness of Investors to Invest in Private Markets
20 Years of SFI—A Look behind the Scenes of World-Class Finance Research
As part of SFI's 20th anniversary celebrations, we are showcasing a selection of finance research conducted by SFI faculty members. Today, SFI ranks among the top 10 finance institutes worldwide. Each edition of our showcase features one SFI professor, presenting their research area, key insights, and the practical impact of their work.
At their core, these blog posts reflect what lies at the heart of SFI: fostering world-class research, advancing knowledge, and bridging research and practice—all contributing to the long term prosperity of Switzerland's financial marketplace and the country as a whole. SFI, growing knowledge capital for the last 20 years and in the years to come.
Our first portrait features SFI Professor Amit Goyal from the University of Lausanne and his research in the field of private markets.
Part of SFI Professor Goyal's vast research field in financial markets concerns delegated fund management and, in particular, how institutional investors choose external money managers. Past research focused on public fund managers. With private markets becoming a lot more important in the asset allocation policies of US institutional investors—constituting about 15 to 20 percent today—SFI Professor Goyal wanted to know how these private market managers were being chosen.
SFI Professor Goyal and coauthors looked at a couple of thousand North American institutional investors (known as LPs) to explore their investments with private market managers (known as GPs). The most notable result was the surprising willingness of institutional investors to invest in private market managers without a track record. Public fund managers would not even get the time of day without a track record, so why are novice private market managers landing big investments?
The most plausible explanation is that there are not enough experienced fund managers for the demand for exposure to private markets. You might think, then, that a willingness to invest with those who lack a track record must mean that institutional investors are getting good results from these rookies. Except that is not what the researchers found. Investment in first-time private market managers is not associated with higher future performance.
Private Equity's Expanding Reach
This research is especially relevant as private equity is making inroads into retail investor portfolios. American 401(k) participants may be particularly impacted, depending on evolving regulation. But it is also a cautionary tale in Switzerland and elsewhere, particularly for those institutional investors who because of their size would not have access to proven private market managers. Going forward, this research should prompt investors and pension participants to pay attention to asset allocations and how any potential private market fund managers are chosen.
More Information
Picking Partners: Manager Selection in Private Markets, (with S. Wahal and M.D. Yavuz)
SFI Prof. Amit Goyal (UNIL)
Amit Goyal is SFI Professor of Finance at the University of Lausanne and holds an SFI Senior Chair. He graduated with a PhD in Finance from UCLA. His research has been published in the top finance journals worldwide and featured in the international press.
"I came to Switzerland in 2008 when SFI was in its nascent years. SFI has been instrumental in raising the research profile of the Finance departments at Swiss universities and improving the Finance PhD programs. Without SFI, there would be fewer researchers in Swiss universities who are doing top quality finance research. SFI put Switzerland on the radar for finance research and connected professors with practitioners, fostering knowledge exchanges among the best minds on important issues in finance."