Wayne Miller / Magnum Photos

By Mark J . Higgins

Over the past several decades , institutional investment plans have substantially increased allocations to alternative asset classes , such as private equity , hedge funds , private real estate and private credit . According to data collected by Equable , public pensions alone have increased alternative asset class allocations from a mere 9.3 % in 2001 to 33.8 % in 2023 .

The thesis underpinning the shift into alternatives is that , despite much higher investment management fees and illiquidity , investors can anticipate sufficient offsetting benefits in the form of reduced portfolio volatility and return enhancement . The problem , however , is that multiple studies reveal that these benefits have

The individuals in this photograph are known as the “ traitorous eight .” Pictured from left to right are : Gordon Moore , C . Sheldon Roberts , Eugene Kleiner , Robert Noyce , Victor Grinich , Julius Blank , Jean Hoerni and Jay Last . After leaving Fairchild Semiconductor in 1957 , they played critical roles in the rise of Silicon Valley and the venture capital industry . fallen short of expectations . Moreover , the fundamental dynamic of the alternative asset class investment cycle strongly suggests that future benefits will become even more elusive . Understanding the history of these investments helps explain why this is the case .

Institutional Plans End America ’ s Capital Drought

“ We cannot depend safely for an indefinite period of time on the expansion of our big old industries alone … We need to marry some small part of our enormous fiduciary resources to the new ideas which are seeking support .”

— Ralph Flanders , president of the Federal Reserve Bank of Boston ( 1945 )

In the spring of 1979 , Ian Lanoff , administrator of pension and welfare programs at the US Department of Labor ( DoL ), was summoned to the White House . He later recalled that it was the only such invitation he received during his five-year tenure . When Lanoff entered the meeting , he noted the presence of several wellknown politicians and financial executives . Their singular goal was to end the capital drought that constrained funding for many of the nation ’ s most promising entrepreneurial ventures .

The root of the capital shortfall can be traced to the Allied victory in World War II . The demands of war accelerated technological innovation in the United States . Once combat operations ceased in the summer of 1945 , American companies saw an opportunity to commercialize many inventions . But the biggest obstacle was obtaining capital . Commercial banks , which remained scarred by the Great Depression , considered such ventures too risky . This prompted the formation of the nation ’ s first venture capital ( VC ) firms to fill the void .

Initially , wealthy individuals were the primary sources of funding for VCs , but by the late 1970s , their resources were stretched thin . In contrast , institutional investment plans , such as pension funds , foundations and endowments , had an

10 FINANCIAL HISTORY | Fall 2024 | www . MoAF . org