The Scariest Word in the World—for Some

Professor John Kay, in his 2012 review of the UK equity market, summed up the problem with middlemen: Intermediation leads to “increased costs,” “increased potential for misaligned incentives,” and “a tendency to view market effectiveness through the eyes of intermediaries rather than companies or end investors.”

Morten Sorensen, a professor at Columbia Business School, co-authored a paper in 2012 claiming private equity limited partners “are just breaking even” due to high fees.

Unsurprisingly, investors don’t want it this way. In the past two years, the Abu Dhabi Investment Authority has hired from Russell Investments, Eagle Asset Management, BlackRock, and GE to boost its internal capabilities in public and private equities.

In the UK, the £49 billion ($69.4 billion) Universities Superannuation Scheme sold 13 private equity funds at the start of 2016, preferring to go direct.

Meanwhile, funds-of-hedge-funds have endured eight consecutive years of outflows, according to HFRI, cutting industry assets by more than 17% since 2007. Providers including BlueCrest, Aurora, and Carlyle have all closed fund-of-funds businesses in recent months.

Asset owners are reaping the rewards of disintermediation. Institutions “increased their net value added by 22.1 basis points” through insourcing, according to a 2015 research paper from CEM Benchmarking. “Investing in investing has paid off,” wrote author Alexander Beath. 

Disintermediation is not all about doing it yourself—and nor is it the reserve of the biggest funds. SPK, the €2.6 billion ($2.9 billion) Swedish banking industry pension, overhauled its portfolio by engaging directly with a select group of asset managers. No consultants were necessary, despite expanding into areas such as risk premia and infrastructure.

Close relationships with fund managers allow investors to access other areas of expertise, CIO Stefan Ros said last year, including “other asset classes, capabilities, and services—for example, producing analysis or asset-liability matching.”

Fund-of-funds managers, polish up those résumés.