In Conversation with Nancy Curtin and Jed Emerson
By Jed Emerson Published November 28, 2022
What should be our core fundamental beliefs regarding the precepts of sound investment practice? Should the beliefs of the past—the beliefs that brought us to where we stand today— ground our practices of the future? And will those practices of the past help us manage dynamic, market and global risks while identifying opportunities to invest in true, long-term value creation, generating sustained returns over decades to come?
There are certain fundamental beliefs in the market when it comes to traditional investing:
But in today’s world of climate crisis, social injustices, and ever-increasing concentrated wealth, what should be our core fundamental beliefs regarding the precepts of sound investment practice? Should the beliefs of the past—the beliefs that brought us to where we stand today—ground our practices of the future? And will those practices of the past help us manage dynamic market and global risks while identifying opportunities to invest in true, long-term value creation, generating sustained returns over decades to come?
If we are to thrive in markets and community, today’s generation of asset owners must not do as generations of the past. To thrive we must take the received wisdom of traditional investors, integrated with the insights of present-day investment innovators, and apply both to create the value we seek in the world we want as opposed to that we have inherited. We must take the best of the known and create evolved investment practices to get us where we need to go, generating not only compelling financial returns, but creating the type of total performance—financial, social, and environmental—we seek to capture for our portfolios, our families, and our world.
To succeed in this effort, we must strip away the cobwebs of established investment practice, clearing away our assumptions to see the foundational truths upon which we seek to build the portfolios of today that will capture the wealth of tomorrow. We must seek to generate not only simple financial profit but true, long-term value for investors and society. We must enunciate an evolved set of core principles of strategy and practice to ground our analysis and fulfill our responsibilities as fiduciaries, family members and citizens.
At AlTi, we seek to advance First Principles of investing that are as simple and complex as those of the past upon which they build. These principles include the following:
All capital and all companies have impact. As the term “impact investing” has mainstreamed, much debate has ensued regarding definitions of terms, the appropriate metrics to assess impact and whether impact investing requires investors to sacrifice financial return. These are important considerations for every asset owner, but they sit behind the more fundamental point: All capital and all companies generate impacts in markets, communities, and the world. It does not matter whether you consider yourself an impact investor. As soon as you deploy capital in the world you enable things to happen and other resources and actors to become active in the world. Whether passive, public markets investor or active seed stage angel investor, your money moves in the world and creates change within it. Why else choose to invest? You seek to influence not only the flow of funds, but business strategy and practice. We can discuss how impact differs from one market or opportunity to the next, for all capital and all companies carry diverse risk, return and impact profiles, but the fact remains: You invest with impact when you invest, so the only question is whether you will manage that impact with strategic intent as opposed to incidental impact and whether that impact is in alignment with the values you seek to bring to the world.
Capital is a social construct. Business schools and financial institutions worldwide operate within a singular understanding that the purpose of capital is to create more capital; that the purpose of capital is its own self replication. Yet, we seldom discuss the reality that this understanding, this definition of the purpose of capital, is simply a social construct created and advanced by those controlling our institutions of finance. It is for this reason we all—from finance professional to asset owner—must pause to reflect upon and advance our own understanding of the purpose of capital. Within AlTi, this is a dynamic and vibrant discussion in which we are proud to engage. Outside of our business, we have witnessed others engaging in this discussion, some even seeking to forbid asset managers from considering off balance sheet risk of environmental and social factors in constructing their investment strategies, while others promote the idea that as long-term asset owners and fiduciaries, asset managers are obligated to assess all aspects of risk that might affect financial returns of portfolios. Both these positions are grounded in social mores—one defending short-term economic interests, the other the long-term financial interests of fiduciaries and those they represent. There is no single, objective definition of the purpose of capital. Each generation—indeed, each individual fiduciary—must reflect upon and advance their own understanding of the nature and purpose of capital.
Blended, Whole and Non-divisible: this is the nature of the value we create over a life, with our financial, personal, social, and natural capital. Modern financial capitalism, premised on a set of philosophical assumptions based on Western traditions, has asked us to embrace a bifurcated value proposition: do well or do good, make an investment or make a gift, work for a for-profit or work for a non-profit. Yet, the fallacy of this proposition is clear: It is obvious that business creates diverse social and environmental impacts just as the charitable sector leverages economic value. The nature of the value we create in our lives and through our institutions is whole, integrated, and non-divisible. It is a blend of diverse components of value creation. In our view, all the rest (for-profit/nonprofit; investment/gift; the various metrics we use to assess the components of each) is simply means to an end, tools to a task. Without clarity on the nature of the task itself, we are lost.
Systems Thinking and Regenerative Investing must increasingly replace the processes of short-term, linear, and extractive investing. In today’s mainstream investment community, “long term” is often understood to be ten years, plus two one-year extensions. Many pension funds and larger family offices seek to manage capital for multiple decades—or in some cases, the real long term—50 years, 100 years, or in the case of one family we know, with consideration of the 1,000-year family. And naturally, it is only on this basis that we may justify a 50-year-old man clearcutting a 500-year-old tree while working for a company that is itself bought and sold on daily basis. In contrast to this traditional investment framework of investing at Time Zero to extract profits at Time Ten, which is atomized, isolated and extractive, we must move our framework towards one that is connected, systems oriented and regenerative. As Nelson Henderson said, “The true meaning of life is to plant trees, under whose shade you do not expect to sit.”
In one recent example, we worked with a VC firm founded and led by indigenous peoples and funded their strategy that invested early-stage capital into indigenous founded companies offering goods and services—as well as engaging in job creation—to indigenous communities. This strategy, given the strong intention to foster a healthier entrepreneurship ecosystem within indigenous communities, requires a different form of capital from traditional VC for a few key reasons. First, the pipeline of indigenous-led start-ups is more nascent, with few business accelerators targeting this population. Second, there is deeply embedded cultural mistrust of financial systems, creating resistance amongst founders to seek out equity capital that will help them scale their business. Third, this VC firm’s intention is to see each portfolio company succeed which may lead to broader allocation of resources than in typical VC where follow-on investments (plus the time / support of VCs) are reserved for perceived “winners” only. Finally, company founders may be skeptical of the intentions of more traditional VC or Growth funds and thus be unwilling to sell their interest into the broader set of funders. All these factors may compress the potential financial return for these early funds, but this strategy is setting the foundation of a thoughtful and robust ecosystem for an otherwise neglected set of entrepreneurs. With the support of catalytic capital developing this unique ecosystem, we anticipate this fund creating a robust marketplace for early-stage indigenous founders in the future.*
Asset Owners may engage in Total Portfolio Management wherein all assets (market rate, near market, and philanthropic) are deployed in a coordinated manner to optimize various levels of financial return together with the generation of diverse forms of impact. The traditional approach to investing is premised on segmenting components of value creation, one from the other. In the same way that we must seek to bring our whole selves to our lives and relationships, we must also seek to bring all our financial resources to bare in the pursuit of the world we seek to create. If we understand the interconnected nature of our markets, communities, and eco-systems, it is only logical that we should seek to reflect that connectivity in our portfolio construction and deployment. We believe that all our assets—market-rate, near-market and philanthropic—must be managed in a strategic, intentional manner if we are to capture the full value potential of our wealth, our investments, and our very lives.
By building a business founded upon these First Principles of investment, together with our clients, we intend to work to advance investment strategies grounded upon an evidence-based understanding of investment opportunity, and we will seek to offer investment solutions on a par with the scale of the investment challenges before us. In the process, we hope to best position our clients and ourselves to be fully present in what we all know is a current and future world of change.
* As stated in our Catalytic Capital Theory of Change document, (November 2023) which is available upon request.
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Jed Emerson is AlTi’s Chief Impact Officer. He has authored several books on the subject, is a frequent speaker at The World Economic Forum and other conferences, and has held faculty positions at universities across the US and Europe.Learn more