THE ECONOMICS OF THE PRIVATE MARKET
Pension funds, which are significant investors in publicly issued corporate bonds, have not been big buyers of private placements, except for a few state pension funds. Market participants suggest several reasons. 70 First, many pension funds have charters preventing them from investing in below-investment-grade or illiquid assets. Although in practice some higher-rated private bonds may be more liquid than some public bonds, market participants generally consider private placements to be illiquid. Second, few state or corporate pension funds are currently staffed with the credit analysts and other personnel that would allow them to become direct investors in private placements. Instead, staffing is directed toward public market investments, which require much less credit analysis. A decision to hire the necessary staff and install the expensive internal monitoring systems to support direct investment in private placements would require a long-term commitment to the private market by the pension manager. Few pension fund managers thus far have been willing to so commit. Even if they should wish to do so, state pension funds face problems in hiring the necessary personnel. Staff size and salaries are generally controlled by the state legislatures, and increasing the size of credit analysis staffs is thus cumbersome and timeconsuming.
As an alternative to direct investment, some pension funds have turned to money managers, often insurance companies. Indirect investments, however, are on a fairly small scale, no doubt partly because pension fund managers are reluctant to invest even indirectly in a market with which they are unfamiliar. The private market operates largely in conformance with unwritten, informal rules enforced by the desire of the major agents and buyers involved to maintain their reputations. To investors that are outsiders, the way the market operates may thus be hard to understand, which may inhibit them from risking their money there. Also, insurance companies themselves, who would be the primary source of the managerial resources necessary for any large-scale activity in this area, have been reluctant to set up separate account private placement funds financed with institutional money. 71 They apparently see little investor interest in such funds or do not wish to interrupt the flow of private placements to the company itself. 72 Furthermore, market participants report that investor experience with at least one separate account fund has not been good because the managing insurance company, lacking a stake in the separate account investments, did not perform adequate monitoring.