The Year of Secret Capital

Editorial Comment: Is 2013 the year that secret capital—the assets of pensions, endowments, foundations, insurance and sovereign funds that buoy global markets—gets its due?

Hedge funds are sexy. Asset managers are gigantic. Custody banks are… custody banks. 

But these organizations are simply playing with other people’s money. Ask the average person on the street—or, astoundingly, even some people within the world of asset management—and they will offer little insight into whose money it actually is. Of course, it’s largely the result of asset owners—pensions, endowments, foundations, sovereign funds, healthcare organizations, and insurance general accounts—that mega-firms such as Bridgewater and Blackrock exist. Yet few know it. 

I call this money secret capital

Twelve months ago, I labeled 2011 “The Year of Stasis” because I felt that the institutional investing world was living up to its reputation of being a cruise ship, not a kayak: when it actually changes course, it does so slowly. 

I am not suggesting 2012 was The Year of Secret Capital, where your average market participant came to understand that it wasn’t the environs of the Upper East Side or Beverly Hills that buoyed the asset management industry and, in many ways, the financial system as a whole. It wasn’t. In the asset owner/asset manager relationship, this wasn’t the year that power finally shifted towards the former. 

But 2013 just might be. 

Power, academically described, is the ability to produce a change in behavior in another. In my September Issue editor’s letter, I wrote the following about the basis of power: 

The great Speaker of the House, Sam Rayburn, had a room. Formally, it was H-128, a moderately sized but ornately decorated, high-ceilinged chamber on the first floor of the Capitol. Informally, it was the Board of Education (or simply “downstairs” to Rayburn), the room back to which the portly Texan would invite a few favored lawmakers to have a drink following a day’s work on the House floor. To be in this room was to be in power. The all-controlling Chairmen of the mighty standing committees of Congress frequented it; Democratic Party policy was often decided in it; Harry Truman, who one day in 1945 had just finished presiding over the Senate as Vice President, received the phone call there informing him that he was, following the sudden death of Franklin Roosevelt, now President. To be outside this room while the Board was in session was to make painfully clear to the uninvited that they were not the paramount possessors of power in Washington. Thus, as a young Congressman new to Washington in the 1940s, Lyndon Baines Johnson, along with nearly every member of Congress, obsessed over one question: “How do I get in that room?” 

We all want to be in that room. Anyone who says otherwise is lying. That room, at its most fundamental, is power—the acquisition, maintenance, and spending of power. From the President of the United States to the private-equity titan to the backcountry bumpkin, we all want to influence the actions of others. This is because we all require resources: shelter and food at its most basic, adoration and affection at its more trivial. Power is the avenue by which these resources are won or lost. 

What I failed to do—on purpose—was to deal directly with the idea of power as it applies to the asset management industrial complex. I’ll do so now. If power in American politics is getting in that room, power in asset management is the ability to align the interests of those who allocate the capital with those that invest it on the allocator’s behalf.