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Outside money pollutes the investing
The fund manager's business
A manager running fund cycles has to deliver returns to a fund and its investors, then think about the next one. Investment outcomes become a product the manager sells, and the manager is really running a business. When new funds need to be raised, that moment arrives no matter how often the long-term horizon is mentioned. A public alternative asset manager also cares about the multiple the market will give it, which shapes how the business is structured. The craft of investing is diluted one way or the other. Some managers stay small and chase outsize returns because of how they approach the problem.
One's own balance sheet
Managing one's own balance sheet changes what there is to think about. All that matters is taking the capital, deploying it into the world at the right rate of return, and seeing what the capital does. That allows much better investment hygiene. There is no need to react and no investor update where investors with different circumstances and priorities create tension that pollutes the investment process with the nature of the business.
The mutual insurer
A mutual insurer has no shareholders pushing for dividends or buybacks. Its one structural requirement is that it can't raise equity, and the rest of what it does with capital is a choice.
How do fund cycles shape manager behavior?
A private equity or similar fund typically has a life of about ten years, and its managers raise a new fund every few years. Investors deciding whether to back the next fund look closely at the track record of the last one. Managers are usually paid a management fee on committed capital plus a share of profits, often 20 percent, known as carried interest. The calendar of fundraising therefore runs alongside the calendar of investing.
How does a mutual insurer differ from a stock insurer?
A mutual insurer is owned by its policyholders rather than by outside shareholders. Profits stay in the company as surplus or return to policyholders instead of going out as dividends to investors. Because a mutual has no stock to sell, it cannot raise capital by issuing equity, though some can issue debt such as surplus notes. Many of the largest US insurers began as mutuals in the nineteenth century.
Why do public managers care about their own multiple?
A publicly traded asset manager is valued by the stock market on its earnings. Stable management fees tend to earn a higher multiple than profit shares that rise and fall with markets. That difference gives listed managers a reason to favor products that produce steady fee income. The structure of a firm's revenue therefore feeds into its stock price.
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