The Financial Industry Sets Sights on Institutional Investors: A Relational Approach to Property Investment Outsourcing

Abstract

Over the past few decades, pension funds have emerged as major players in global financial markets as the reserves they manage have grown steadily. In this context, trustees are confronted with acute dilemmas regarding how best to generate investment returns to beneficiaries. This involves crucial decisions regarding the diversification of investment portfolios as well as decisions on whether, when, and to whom to outsource investment functions and tasks. The literature in economic geography has frequently treated outsourcing decisions as taken by the asset owners based on criteria such as costs of coordination, availability of information, governance structure, and internal expertise. Focusing on the outsourcing of property investment by Brazil’s largest pension funds and drawing on a relational approach, this article investigates the actions taken by the real estate investment trust (REIT) industry to attract and retain pension fund money into their investment vehicles. It is claimed that REIT managers have acted on three dimensions to capture pension fund money: (1) by influencing the regulatory framework affecting pension funds, (2) by building networks of trust with pension fund managers and trustees, (3) by adapting internal procedures to the expectations and needs of institutional investors. Putting the spotlight on the evolving, power-laden relationships connecting key actors in finance, we were able to demonstrate how the pooling of money by financial institutions is politically and socially constructed and how it changes the geography of money flows.

Key words:

• pension funds
• real estate investment trusts
• outsourcing
• financial markets
• financialization

Acknowledgments

We would like to thank Thierry Theurillat and Olivier Crevoisier for their comments on previous stages of this research. We also thank the three anonymous reviewers and editor Jane Pollard for their insightful comments and suggestions.

Notes

1  In Brazil, REITs are overwhelmingly managed by asset management firms. Thus, when we refer in this article to REITs as political actors, we are alluding to departments of the financial institutions that manage these vehicles.

2  Throughout the article, we will differentiate between what Clark and Monk (2017) call asset owners, which includes pension funds and other institutions like endowments, family offices, sovereign wealth funds that own a substantial amount of financial assets, from asset managers, which refers to the financial institutions that charge fees to manage the resources of these organizations.

3  We deem an asset noncorrelated when its returns are not directly correlated to what happens in other asset classes such stocks and bonds.

4  The universe of stakeholders involved in regulatory circles is small (no more than ten important individuals at the levels studied) and difficult to reach. Thus, the interviewees selected, although few, represent a reliable representation of the discussions undertaken by this select group of bureaucrats and market agents.

5  Still very limited for pension funds in Brazil, around 10 percent of the portfolio.

6  Especially in this section, we used the term stakeholder generically to protect the identity of our interviewees.

7  By agenda setting we mean all those pre-decision stages of discussing and defining a problem that then has to be addressed by targeted policy intervention (Kingdon 2003; Majone 2008).

8  As previously studied by Sanfelici and Halbert (2019), Brazilian REITs have already lobbied to further their interests in the financial market. Although several studies on financialization have already addressed how regulatory capture and policy development through informal governance networks enhance the uses of financial vehicles, here we provide an insightful look into how the relationships between interested actors indeed promote the uses of financial vehicles by institutional investors.

9  Here, we were unable to verify whether the relation occurs only through formal channels. However, we understand that this “regular” proximity includes informal networks as well.

10  Similar interactions between asset owners and asset managers were observed in farmland investment conferences (Ouma 2020).

11  We attended an event hosted by pension funds in October 2018, a few months after Regulation 4.661 came out. That year, we observed that a large part of the technical lectures had a focus on the real estate market, and a large part of the sponsors and companies with stands were important REIT managers.