U.S. aphorist Mason Cooley once said, “Good advice is never as helpful as an interest-free loan.” Few in the buyout community would dare argue those sentiments, but perhaps never before have the givers of advice wielded as much influence and power as the gatekeepers do today-and GPs are taking note.
After five or six years on the sidelines, many buyout pros reentering the fundraising market have noticed a marked difference in the level of sophistication among LPs. “The market’s certainly gotten savvier,” one GP observes, while another notes, “The industry has matured to the point that there’s a much tighter banding in terms of sophistication among the limited partners.”
The gatekeepers have largely been credited with helping to implant this “sophistication.” Public pensions, endowments and even corporate pension plans have enlisted advisories to help guide them through the private equity market. Even the savviest of institutional investors will procure consultants to obtain introductions to some of the more elusive GPs. CalPERS, for instance, reportedly keeps roughly 28 consultants on the payroll to assist with its portfolio. The end result is that GPs today are asking the right questions and putting forth a level of due diligence not seen in past cycles.
With this proficiency, though, has come some complaints. Gatekeepers have already been taking heat from the limited partner side, and recently the SEC weighed in on the potential for conflicts of interest when consultants serve both the pension funds and the money managers they recommend. (CalPERS last month adopted strict new policies regarding the disclosure of potential conflict-of-interest issues.)
However, new gripes are emanating from an exasperated GP universe that can grow weary of the politics involved. The objections from those raising funds range from the high rate of turnover among gatekeepers to the motivation of advisors that are perceived to be based less on achieving certain return objectives and more at finding an efficient way to fill portfolios.
One buyout pro, who’s currently raising a large market fund, notes, “Part of the problem is you have a public pension fund that needs to cover their ass, so they hire a gatekeeper to give their blessing to the investments. Since they only want to pay the minimum, they end up getting junior people working on the mandate… Ultimately, you get what you pay for.” The source adds, “Of course this isn’t true of all gatekeepers, but we’ve seen some work that’s extremely shoddy because of this.”
Meanwhile, another point of contention is that since the gatekeepers are generally working on a number of pension plan mandates at any given time, some will essentially try to kill five or six birds with one stone.
“The advisors tend to only become backers of the funds that have room for a group of investors,” one GP observes. “They’ll try to find one fund that will allow them to bring in five or six investors rather than doing individual work that fits an LP’s particular needs… You have to wonder what kind of fund [in the middle market] would have $100 million to $200 million of availability to give.”
The advisors, though, are quick to defend their turf. “The notion that most [institutional] investors can deal directly with GPs is false,” one pro on the consultancy side tells Buyouts. “Private equity is a very specific asset class and most investors need an intermediary to efficiently and effectively access it.”
Moreover, advisors also reject the claim that they merely pick out funds that can accommodate a good chunk of their clients. “When we find a good fund, of course we’re going to try to put all of our clients into it if it meets their needs,” the source states. “There’s no benefit to finding a different opportunity for each client… It’s a process that as long as you do it openly and fairly, there shouldn’t be any problems.”
However, despite the attacks gatekeepers are taking from both sides, the LPs and the GPs, most people agree that the market is better off because of them. The limiteds continue to hire advisors, demonstrating their appreciation, while GPs realize they’re going to need to work with them if they want to fill their funds.
One GP says, “Especially in today’s crowded market, these folks are providing a great service. The amount of due diligence they perform on any single fund would be impossible for the thinly staffed pensions.”