There are three important reasons to invest in the "Innovation Economy." They are: outsized returns, disruption to existing markets, and portfolio diversification.

A lot of wealth is being generated pre-IPO. The majority of pensions within the United States are managing to a 7 percent discount rate. There is a danger of flat returns and what the impact will be on future contribution rates.

Economists at the investing giant Vanguard predict that over the next 10 years, annual U.S. stock market returns will likely average between 3-5 percent. In the new world, investors turn to the private markets to seek alpha.

Creating a strategy to invest in the "Innovation Economy" is a critical tool to achieve a 7 percent return. U.S. venture transactions continue to rise with angel, early, and late-stage round-size all increasing in 2018.

According to Pitchbook, across all stages, median pre-money valuations increased significantly during the first half of 2018 with angel/seed valuations up 17 percent from 2017 and later stage valuations up 25 percent to 45 percent. This trend continues in 2019.

Disruptive technologies and innovation either create new markets or modify or obliterate existing markets. Yesterday, the disruptors focused primarily on consumer sectors such as the music industry, travel booking, newspapers, magazines, and book publishing. Today, it is groceries, residential dwellings, entertainment and personal transportation.

Think Amazon, Airbnb, Netflix and Uber. Innovation and technology are transforming old world industries (e.g., financial services, healthcare, government, and logistics/manufacturing). In the smart enterprise space, companies are re-inventing and replacing the decades-old technology infrastructure behind major industries. The role of technology in alternative data and artificial intelligence will disrupt our understanding of value. Technology is at the core.

How we invest today will not be how we invest 10 years from today.

Prudence dictates diversifying asset class allocation. Investing in the Innovation Economy affords you the diversification to weather bad choices because we do not know where the next disruption will come from and how it will affect your portfolio.

Wayne Gretzky is reported to have said: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.” This philosophy is utilized by top institutional investors who seek to profit from opportunities in which future performance is not reflected in today’s price. This is the Innovation Economy.

It’s also about culture. The culture of innovation and invention does not grow and thrive in traditional business environments. Institutions reward the ability to return a yield on investable assets — be it human or financial capital — and execute successfully. Where you innovate is a different place from where you run efficiency. Innovation doesn’t fit inside an efficient organization. Innovation thrives when it has resources, where failure is endorsed and accepted, and where waste is part of the process.

Pension funds and other large institutions require early stage intelligence from the Innovation Economy but grapple with how to address it. Many institutional investors cannot directly participate because they lack benchmarks, structure, or venture/growth equity talent.

For example, Sidewalk Labs, Ontario Teachers and Alphabet recently teamed up to launch an infrastructure holding company being spun out of Sidewalk named Sidewalk Infrastructure Partners (SIP). They are utilizing technology at scale to modernize the aging urban infrastructure. SIP will back large-scale infrastructure projects and purchase or take stakes in fast-growing technology companies whose products are being used in these projects.

How does one maximize key learnings in the Innovation Economy to the benefit of institutional investors and create vehicles that allows them to participate?

Here’s a snapshot of some examples around the globe of innovative vehicles launched to access the Innovation Economy.

In Canada, they can grow them internally. Ontario Teachers' Pension Plan is launching a new investment department, Teachers' Innovation Platform (TIP). TIP will focus on late-stage venture capital and growth equity investments in companies that use technology to disrupt incumbents and create new sectors. UC Regents built UC Ventures. UC Ventures is an investment vehicle designed to monetize the economic value that the University of California is creating through its pioneering research.

Public Sector Pension Investment (PSP), one of Canada largest pension managers, has seeded over 10 private equity GPs over the past few decades. SoftBank’s Vision Fund, backed by the Public Investment Fund and Mubadala, has changed the venture capital landscape. Alaska Permanent, Wafra, and RailPen collaborated to launch a private equity seeding platform.

TMX Group, owner and operator of Canada's premier equities exchanges Toronto Stock Exchange and TSX Venture Exchange, is working with industry partners to create the Innovation Growth Fund (IGF), a new initiative designed to support Canadian start-ups and innovation companies during the critical early stages of growth.

"The spirit of innovation and entrepreneurship continues to thrive in Canada as new companies with breakthrough concepts work to redefine our country's economic identity on the global stage," said Lou Eccleston, Chief Executive Officer of TMX Group.

"TMX is a proud participant in the development of the IGF, an exciting industry-driven initiative designed to support Canada's innovation economy now and into the future by connecting investors to disruptors at the cutting edge. In our role at the heart of Canada's capital markets, we remain firmly committed to enabling companies to access the crucial growth capital they need and to providing opportunities for investors to participate in that growth."

What is needed is a strategy to grow internally or externally seed vehicles from scratch and align the strategy and incentives of the talented people with the goals of your own organization.

What happens if you don’t? As with Wayne Gretzky, the Innovation Economy is like the hockey puck. You as the investor want to be where the puck is going.

Dana Hollinger contributed to this report.

Dana Hollinger is a Managing Director of ABG Advisory and previously served on the CalPERS board, ICGN board, and the Women’s Leadership Board to the JFK School of Government at Harvard.

Jackson Eisenpresser is CEO of ABG Advisory and previously served as Director of Principal and Advisory Strategies at Tony Blair Associates.