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.