What have we got in common with a medieval seafarer?By James Crisp on 24 January 2013
It is clear that the European economy needs long-term financing. It is just as clear that traditional long term institutional investors, such as pension funds, insurance companies, endowments, foundations and sovereign wealth funds are facing increasing difficulties to deploy capital in less liquid asset classes.
There is not one single, straightforward answer to this difficult issue, but at Invest Europe we strongly believe that much can be learned from the private equity industry.
But what has a medieval seafarer and a private equity fund manager got in common? A lot more than you might think!
As we show in the latest Invest Europe Briefing, “Long-term investing: A route to sustained growth”, private equity funds are the heirs to a long and noble tradition that has its roots in the financing of merchant shipping.
Italian merchant families financed trade voyages through ‘commendas’. Spices, garments, wine, weaponry and much more were traded between the ports of Venice, Constantinople and Alexandria.
While the potential rewards were great, the voyages were risky ventures subject to storms and even crusaders. Such journeys required skills, a daring and nimble ‘crew’ and could not be micro-managed.
In this partnership, the ‘sleeping partners’ stayed at home while the ‘travelling partners’ controlled the venture searching for profitable business. At the height of Venetian trading power, sleeping partners made small investments in a large number of commendas to spread the risk.
While the commendas backed voyages to seek out spice and wine, today’s private equity, venture capital, infrastructure and property funds use a similar model of long-term collective investment.
Only today the medieval merchant families have been replaced by institutional investors, the swashbuckling sea captains by professional fund managers and instead of seeking out wine and spice, the modern commenda, or limited partnership, is a vehicle to help grow companies, build hospitals and develop clean power generation.
The Briefing also explores how the unintended consequences of current regulation are also impeding long-term investors from long-term financing.
Nearly one thousand years ago commendas were the economic engine that turned Venice into a world power.
As the European Commission kickstarts a much needed debate on long term investment via a forthcoming Green Paper, it could do well to look at private equity and venture capital funds for inspiration. These modern day commendas can help Europe navigate its way out of these challenging times as well.