Development Finance Institutions (DFIs) manage assets totaling $23 trillion, yet little research has been conducted on their investment activities and impact. We document that DFIs have increasingly invested in venture capital (VC) over the past three decades, participating as limited partners in one out of every six deals. We collect the mandates of DFIs and identify four main objectives they pursue through VC investments: building a VC ecosystem, supporting entrepreneurship and small and medium-sized enterprises, fostering innovation, and promoting sustainable business practices. We empirically test whether DFIs meet these objectives by addressing market failures, including externalities, information frictions, and coordination challenges. Our findings vary between developed and developing economies. In developing economies, DFIs are more likely to target industries with positive externalities, provide capital to underrepresented fund managers, and improve return transparency. However, they are less likely than conventional VC investors to support young funds or early-stage deals, and their investments have no significant impact on firm growth or innovation. In developed economies, we find little evidence that DFIs address market failures and their impact is even more limited. Overall, our findings suggest that DFIs have significant room to enhance their impact by better addressing market failures, aligning investments with stated mandates, and embracing higher risk in their portfolios.

Target date funds (TDFs) are investment products designed based on the life-cycle theory to provide exposure to risky assets conditional on investors' age. Even though life-cycle portfolio choice models do not distinguish between different subcategories of risky assets, we document that in practice, TDFs adopt and maintain rigid allocation weights to domestic and foreign equities. Our main finding is that TDFs implement contrarian rebalancing trades. These trades offset 53% of the mechanical allocation changes caused by realized differences in returns between domestic and foreign equities within the same quarter. TDFs are organized as funds-of-mutual-funds and their holdings account for 10% of the total assets managed by U.S. foreign equity mutual funds in 2022. We show that TDFs' contrarian rebalancing trades have three implications for international capital markets. First, the growth of TDFs significantly changes the prevalent positive flow-performance sensitivity among mutual funds: foreign equity mutual funds with higher TDF ownership experience outflows when foreign equity outperforms domestic equity. Second, the returns on foreign stocks with higher TDF ownership co-move more with the U.S. equity market and less with the foreign equity market. Finally, at an aggregate level, currencies affected more by TDF rebalancing flows appreciate more when the U.S. stock market delivers higher returns.

Despite the incentives of incumbent domestic listed corporations (DLCs) in the electricity generation industry, private equity, institutional investors, and foreign corporations have played an outsized role in financing the energy transition. These new entrants are twice as likely to create power plants as incumbents. They owned 58% of wind, 47% of solar, and 34% of natural gas electricity production as of 2020. The ownership changes are concentrated in deregulated wholesale markets which attract more capital from new entrants to create renewable and natural gas plants, acquire existing plants, and accelerate the decommissioning of coal plants. Sales of fossil fuel plants from DLCs to foreign corporations result in some leakage, but private equity has similar decommissioning rates to incumbents. The new ownership types create more efficient power plants with a lower heat rate and improve the efficiency of acquired plants. Our results also highlight an important tradeoff in bringing new financing sources to the electricity sector. When selling electricity, private equity and foreign corporations use contracts with shorter duration, shorter increment pricing, and more peak-period sales, and obtain a $2.59 higher average price per MWh.

We examine the role of investment consultants in shaping the investment policies of U.S. public pension funds. General consultants assist pension funds with asset allocation decisions, and their clients implement similar target allocations. Specialized consultants are increasingly hired to advise on scaling-up investments in private markets and their clients achieve this often by selecting the same asset managers. The convergence in allocations and investments among pension funds using the same consultant, coupled with growing consultant concentration, has significant implications. Although consultants do not improve access to managers in private markets and overall performance, they substantially influence allocations and capital flows.

We study how portfolio rebalancing needs drive secondary transactions of illiquid stakes in private equity (PE) partnerships. To identify secondary sales of limited partner (LP) interests, we use the return reporting patterns of public investors for funds underlying their portfolio. We find that pensions overallocated in PE tend to sell their stakes in the secondary market, rather than increasing their target allocation or reducing the number of new commitments. The evidence from the distribution of discounts highlights the costs of this denominator effect due to self-imposed portfolio rebalancing policies at public plans.

Institutional investors can be segmented into investors that hold simple portfolios of traditional equities and bonds, and investors that manage complex strategies in public and private markets. Investors implementing active portfolio management and holding diversified portfolios of equities and bonds are more likely to invest in alternative asset classes. The performance of institutional investors in alternative assets is significantly lower than in equities, suggesting that investors accept lower returns in exchange for diversification benefits. Institutions delegate 90% of their alternative investments to external managers and funds-of-funds. These intermediaries capture large part of the potential diversification benefits through higher fees and lower returns.

The return expectations of public pension funds are positively related to cross-sectional differences in past performance. This positive relation operates through the expected risk premium, rather than the expected risk-free rate or inflation rate. Pension funds act on their beliefs and adjust their portfolio composition accordingly. Persistent investment skills, risk-taking, efforts to reduce costly rebalancing, and fiscal incentives from unfunded liabilities cannot fully explain the reliance of expectations on past performance. The results are consistent with extrapolative expectations, as the dependence on past returns is greater when executives have personally experienced longer performance histories with the fund.

Institutional investors expect infrastructure to deliver long-term stable returns but gain exposure to infrastructure predominantly through finite-horizon closed private funds. The cash flows delivered by infrastructure funds display similar volatility and cyclicality as other private equity investments, and their performance depends similarly on quick deal exits. Despite weak risk-adjusted performance and failure to match the supposed characteristics of infrastructure assets, closed funds have received more commitments over time, particularly from public investors. Public institutional investors perform worse than private institutional investors, and ESG preferences and regulations explain 25-40% of their increased allocation to infrastructure and 30% of their underperformance.

Representation on pension fund boards by state officials—often determined by statute decades past—is negatively related to the performance of private equity investments made by the pension fund, despite state officials’ relatively strong financial education and experience. Their underperformance appears to be partly driven by poor investment decisions consistent with political expediency, and is also positively related to political contributions from the finance industry. Boards dominated by elected rank‐and‐file plan participants also underperform, but to a smaller extent and due to these trustees’ lesser financial experience.

The unique regulation of U.S. public pension funds links their liability discount rate to the expected return on assets, which gives them incentives to invest more in risky assets in order to report a better funding status. Comparing public and private pension funds in the U.S., Canada, and Europe, we find that U.S. public pension funds act on their regulatory incentives. U.S. public pension funds with a higher level of underfunding per participant, as well as funds with more politicians and elected plan participants serving on the board, take more risk and use higher discount rates. The increased risk-taking by U.S. public funds is negatively related to their performance.