07-17-2025
The combined assets under management by pension funds, endowments, foundations and sovereign wealth funds exceeds $37 trillion — making understanding allocation decisions and their performance implications a matter of considerable economic importance. In a pair of recent papers, Deniz Yavuz, the Hanna Rising Star Associate Professor of Management at the Daniels School of Business, along with co-authors Amit Goyal and Sunil Wahal, examine how institutional investors allocate capital to investment management firms across public and private markets.
The first paper, “Choosing Investment Managers,” accepted for publication in the Journal of Financial and Quantitative Analysis, explores the role of personal relationships between asset managers and plan sponsors. The authors use proprietary data from Relationship Science — a firm specializing in mapping professional connections, particularly below the executive level — to measure ties among plan sponsors, investment managers and consultants (e.g., “relationship directors” assigned to clients).
Analyzing 5,245 selection decisions made by 1,336 U.S. plan sponsors between 2002 and 2017, involving more than $1.1 trillion in delegated assets and 644 investment managers, the study finds that social connections significantly influence manager selection. The economic impact of these connections is comparable in magnitude to the influence of past performance. However, these relationship-based selections do not lead to superior future returns relative to other investable options. This implies that the financial benefits of such allocations are disproportionately captured by investment managers — who receive flows and fees — while plan sponsor beneficiaries do not experience improved gross-of-fee outcomes.
The second paper, “Picking Partners: Manager Selection in Private Equity,” under revision at Journal of Financial Economics, turns to manager selection in private equity markets, focusing on buyout, venture capital, real estate, growth, private credit and infrastructure funds. The authors analyze over 63,000 capital commitments by institutional investors (LPs), considering their choices from a feasible set of general partners (GPs). Selection in private markets presents unique challenges, as prior performance data for GPs is often unavailable, especially for first-time or newly established funds.
The study finds that although LPs do respond to past performance when observable, they are also surprisingly willing to invest in GPs with no performance history. Indeed, the probability of selecting first-time or young GPs is nearly equivalent to that of selecting GPs in the top quartile of past performance. This behavior cannot be explained by higher expected returns; the expected excess internal rate of return (IRR) is −1.92% for first-time funds, compared to 2.71% for top-quartile funds.
The most plausible explanation for this finding is that LPs, particularly those facing pressure to increase exposure to private markets, allocate capital to new funds due to a shortage of capacity among incumbent GPs. Consequently, first-time funds disproportionately attract allocations from LPs seeking to meet their target allocations despite the performance uncertainty.
Taken together, Yavuz and his coauthors’ work reveals a complex mix of social dynamics, constraints and strategic compromises that drive allocation decisions — often without clear benefits for end beneficiaries.
