Thursday, August 15, 2013

Perpetual Prudence. Making a Difference at the Core

I learned today of an admirable group called Nexus Europe. On its website, it describes itself as:

"an international network of more than 1000 young investors, philanthropists, social entrepreneurs, influencers, and allies who work to increase and improve philanthropy and social impact investing. The network collaborates to advance the potential of next generation leadership across nations and sectors as well as to bridge communities of wealth and social entrepreneurship for dialogue, group problem solving and education."

Energizing and inspiring stuff. But like so many of these world-change convenings, this group seems to be focused on the limit, not at the core.

Which leads me to ask the question, How can we expect to make a difference at the limit, if our system is so unbalanced at its core?

The imbalance I am directing your attention to is the way our large, purposeful, powerful stewards of perpetually entrusted funds, like pensions, endowments, foundations, sovereign wealth funds and even family wealth funds, invest as if they were small (relative to enterprise), idiosyncratic, leverage-limited, and time-limited, individuals. They speculate.

These stewards of perpetually entrusted funds are not small. They are large.  Collectively, they control something like 20-25% of all the capital held for investment in the global economy today. Maybe more.

They are not idiosyncratic. They are purposeful.  They are organized by a charter that is designed to use money to achieve some other goal, not just to use money to make more money. A pension is chartered to provide income security in retirement. An endowment is chartered to support a college, university or other institution of knowledge and learning. A foundation is chartered to give back. There are many different missions, but they all share this one thing. They are all about others, and about the future. They are all responsible not just to themselves, not just for themselves, but to and for successive generations of entrusted beneficiaries under their governing charters of trust.

They are not leverage-limited. They are powerful. They have scale. They have purpose. They have time. That gives them leverage.

They are not time-limited. They are long-lived. Perpetual, really. Unlike individuals, who invest when they can, hold while they can, and sell when they need the money, the stewards of these perpetual trusts never need the money. 

Stop for a moment, and let that sink in. 

For many of us who encounter this thought for the first time, this is a paradigm shift. We are not used to thinking that you never need the money. Most of us, at some point, do.  So, this is a shift in paradigm.  It takes time to make this shift.

OK? Now, ask yourself this question. If a perpetual trust never needs to sell, because it never needs the money, why are they doing all this buying and selling?

For the answer, follow the money. That is how Wall Street makes its money. The largest of our perpetual trusts have become the biggest gamblers at the highest stakes tables in the biggest gambling halls of what has become the great game of Casino Capitalism. Brought to us by Wall Street.

Why are we doing this? We take trillions of dollars of entrusted funds put aside specifically to provide for the future for ourselves and others, and we turn them over to paid professional speculators who use these funds to play a zero-sum game of psyching the other guy out. It's like the high-stakes poker game in the James Bond movie, Casino Royale. Then we wonder why we have lost the balance in our financial markets. Why there is such an excess of bad behavior. Why banks are too-big-to-fail, but the rest of us have to pay the price for their miscreant market manipulations. Why the rich are getting richer, and the poor - and the not-so-poor - are getting kicked to the curb. Why the booms are getting bigger, triggering busts that are ever larger, and more devastating.

We don't have to be doing this. Perpetual trusts don't have to speculate. They have another choice. They can negotiate. They can sit down directly with values-driven leaders of wealth-creating enterprises, and agree the terms of their investment.  And they don't have to sell out in order to get their money out. They can stay in, and take their agreed shares of the cash flows flowing to equity within the cash flow waterfalls of the enterprises they sponsor, for as long as those enterprises continue to generate cash flow, earning returns in increments, over time, as their fair share of the physical wealth being actually created in the real economy by the enterprises they are sponsoring as capital providers. Think of it as Evergreen Private Equity. It's a better fit for their fiduciary obligations than all this buying and selling, back and forth, between each other. It's better for them. It's better for us. It's better for business.

Right now, however, the standards of prudence for these perpetual trusts are the same as for personal trusts, which are the same as for us when we invest as individuals.  But perpetual trusts are not the same as personal trusts. They are not the same as us. They are different. They are larger. Larger in scale, larger in purpose, larger in leverage and larger in longevity.  Larger in possibilities, in capabilities, and in responsibilities.

When it comes to investing, size matters. We need standards of prudence that are sized to what matters. We needs standards of prudence that are sized to perpetual trusts. We need standards of perpetual prudence.

It is not prudent for perpetual trusts to speculate. It is prudent for them to negotiate.

When we make this one, small change at the core, when we replace speculation with negotiation by perpetual trusts, we will restore the balance we have lost in our financial system.

Think of the possibilities that will open up for making a real, lasting, sustainable difference at the limit.

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