Imagining an Integrated Model of Ecosystem Investing for the Long Term

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In late October, I was invited to a meeting of the Institutional Investors Roundtable in Dublin as a special advisor.  This is a half yearly meeting of some of the largest pension and sovereign wealth funds in the world, and is specifically oriented toward collaboration and sharing of best practice as it relates to private investments.  As liability driven investors with very long liabilities that generally exceed 40 years, these institutions have a significant problem with finding adequately aligned service providers in the financial markets system.

A key consideration in the area of corporate development of such long term institutional investors is to continually advance the opportunities for long term investment.  There has been an evolutionary path from the capital markets to private investing, through real property and infrastructure, to regional super investment.  It is possible to imagine that a next step in this path could center on investing in economic development in emerging markets.

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There are many myths and misconceptions about investing in emerging markets.  Additionally, many institutions are not willing to consider any investment that is linked directly to economic development.  And yet there is a great opportunity to access good risk adjusted returns from investments in these areas.

A possible innovation in this area is the development of a more integrated model for investing in emerging markets.  This model is an expansion of the “life cycle” investment model that was pioneered by a few of us in the technology investing space.  In that model, there is an anchor investor who undertakes to invest in a technology opportunity, starting at the benchtop and taking it all the way to market presence and market primacy.  Along the way, that anchor investor engages an ecosystem of other kinds of funding partners and development partners to create a successful venture.

Through a series of thought experiments, I will start to see if there is a way to build an integration that brings together the various parties in the emerging markets ecosystem, from philanthropy, through official development aid, through civil society, and on to long term institutional investment.  Let’s see where this goes…

 

The GeoCentric View in Economics 1

The earth is the centre of the universe – what a crazy thought, right? But during the various transitions from the geocentric, to the heliocentric and, more recently to a relativistic model of our place in the cosmos, many forward thinking persons lost their place in society, their livelihoods, their lives. Great efforts were made to maintain a status quo on this question, to the level of absurdity! It is still going on now. Whether in astronomy or in mathematics, medicine or architecture, the stranglehold of conservative thinking has significantly hampered progress.

I don’t know about you, but whenever I dig into the Ptolemaic model for stellar mechanics, I become completely lost. Of course, I could also say that the I had a similar experience when I worked my way through general relativity! But the complexity of the Ptolemaic model was quite profound, and it was based on some very basic assumptions that derived from Aristotelian philosophy. So a fundamental axiom that was based on a narrow interpretation of the human condition drove the creation of a model that could never really describe what was actually going on.  What?  And the model was declared wisdom for a thousand years?

What does a “geocentric” type model in economics look like? Have we based the fundamentals of our economic models on a basic interpretation that is flawed? To be sure, the economic model attempts to describe a human activity, so it might make some sense to put the human condition at the centre of it. But what is really at the centre of the mainstream economic models? Isn’t the classical model of economics centred on the idea of institution – households, enterprises, municipalities, nations?  How is monetary policy driven, except through the institutions?

What does a “heliocentric” model look like?  What is the centre around which everything else revolves?  We could argue that the fundamental component of any economic system is human value. This leads to a number of conclusions, including the idea that the commoditisation of human value is a great source of evil in the world, driving things like slavery, war, prostitution. But, as in the astronomy debate, it can reveal important concepts upon which to base a real model for economics.

What does a relativistic model of economics look like?

Gravity FallGeneral relativity describes the effect of gravitation in the universe. One of its fundamental insights is that gravitation is experienced when the natural world-line of a particle is disrupted. We observe weight, not because it is the natural state, but because the natural state has been disrupted. We are experiencing the effects of an acceleration in the opposite direction of the natural fall of the space-time matrix. So our observable world is not the natural state of the world, but the altered state. It is even more interesting to think of this in terms of time. We experience time purely as an altered state of the infinite. Contemporary physics describes the mechanisms of how we experience these fundamental alterations as broken symmetry.  And we build the most expensive machinery in history to help us see the point of disruption.

Can we imagine an economic model that would reject the hoary old concepts of classical economics and, building on the basis of a human value centred model, describe the natural economic field? What if the fundamental unit of human output became the form against which we measured things like inflation? It might be fruitful to examine some fundamental human output, such as what is seen in the performing arts, or in the analytic professions, such as the law or medicine, where there are no substantial shortcuts or productivity gains that arise as a result of new technology. Against such a universal measurement, we might start to see the world of productivity rushing by, ever accelerating. If the cost of hearing a single violin played well is compared, from the time of Vivaldi until now, how would we then see inflation, or monetary policy?

This analysis has been explored, in the Annales School in France, for example, or in Baumol’s Cost Disease theory. It may also begin to answer one of my own pet interests, the place of human rights in economic transactions. But most importantly, it may start to drag economic thinking out of the dark ages and through a greater enlightenment into a post-enlightenment world. We could use a little more of an enlightened view and a little less Spanish Inquisition in this very human discipline.

A question of human rights

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I would like to ask a question:

 

  • Why aren’t human rights a central consideration in an investment decision?

 

In late 2013, I was asked to give a presentation to the UN Working Group on the post 2015 development goals, and I led the discussion off with this question. Needless to say, the committee was surprised by the question and by who asked it.  However, I believe we do not ask this question nearly enough in the narrow world of capital.

Lets tell a secret that needs to be told. Much of the assumptions that we employ and claim to be true in the capital business are just convenient myths. We then apply mathematics, much of it also conveniently simple, to these convenient myths, and use them to build the structures of the business, all the while not looking too much at what goes on behind the curtain.

Do you need a tangible example? Try the efficient market hypothesis. This at its most basic is a statement about information theory. However, the value of market information is inversely proportional to the number of market participants using it – that is, the market is made as a result of information asymmetry. A truly efficient market has broad entropy and very few opportunities for profit. Yet we promote this idea heavily in our business schools and celebrate it in the public market. And beyond that, attempt to apply it in private equity.

So back to the original question. There are many answers, ranging from “human rights are the concern of individuals who are free to make their own choices; transactions are independent of an individual’s concerns”, to “the consideration of human rights is already efficiently priced into the transaction”, to “the laws on human rights are not applicable in a transaction”. Presumably, the principles behind the laws on human rights are also not applicable.  Also, I suppose we must presume that individuals are not generally coerced against their best interests by economic factors.

Perhaps the flatland of the efficient market hypothesis is really a very noble attempt to eliminate avarice from the market, and thereby, eliminate one of the seven deadly sins. I suppose you could argue that this makes the world a slightly better place, which at its core is an attempt to protect human value and thereby protect human rights. Really? Well, it has to be about something, because for sure, it is not about describing the actual capital market.

So I haven’t even started answering the question. But over the next several posts, I would like to try to dig a little deeper.This isn’t going to be a Dworkin vs. Hart debate on the nature of law, its just a few miscellaneous ramblings which are rolling around in my head as I work on more formal discussions on capital and development. Lets see where they go.

Remember, you can always throw your shoe at the monitor if you don’t like what I have to say…

Introduction

Welcome to the ramble.

I was sitting with a good friend of mine, and he suggested that I publish some of my views on capital and on corporate development. After thinking about it for about ten and a half seconds, I realized he was right. It is therapeutic, and it offers me an opportunity to articulate some views that I have developed over the time that I have worked in corporate development, capital and strategic advisory.

Some years ago, in the middle of a fun run at a great organization with some very fine colleagues, I was felled by a rare neuro-muscular condition. It put me on the sidelines and my career, which had allowed me to work globally with some remarkable people who became my friends, was ended. My world narrowed into a day to day fight to getting back to some sort of baseline capacity.

My condition appears to have stabilized, but I truly don’t know if I will ever have anything like my previous strength.  However, I still have a host of views on private equity and venture capital, economic development, the ethics of investment, capital markets, portfolio theory, operations research, etc, etc, and of course, etc!

So now, having been forced into taking a deep breath, the plunge, I suppose. Let’s see were this takes us!