UNEQUAL ACCESS

Funds of funds and other private equity advisors are – now more than ever – touting ‘access’ as a primary differentiating factor between themselves and the many other firms that offer private equity investment services.

Just as almost every GP group claims to be in the top quartile, almost every private equity advisor claims to have access to topquartile funds.

“That and track record are probably the most lied about,” says a private equity consultant. Access is more of a buzz word these days because it is harder to get. The few private equity firms with long track records of rock-solid returns are experiencing far greater investor demand than they can accommodate. On the venture side especially, GPs have cut the sizes of follow-on funds, making access even scarcer. Witness Sequoia Capital, which in 2000 showed admirable restraint by raising a sub-mega $695 million fund, but last year shut the doors at $395 million for Fund XI. This despite roughly $5 billion worth of investor interest. Not only were many investors told ‘no,’ but those that got in were often given much smaller allocations than they had hoped.

Top-tier general partners grant access to certain investors for a variety of reasons:

Precedent. Love the one you're with. Shared history counts for a lot in GP-LP relationships. One of the most persuasive claims to access is the simple fact that the LP in question has gained access to previous funds managed by the same GP. “General partners want to reward past supporters – that's real,” says Erik Hirsch, the chief investment officer of private equity advisor Hamilton Lane. Note to investors: Past access is not an indication of future access.

Cachet. It's not fair, but certain types of investors are viewed as more desirable than others. For example, many general partners view foundations and endowments as being especially attractive LPs, partly because of their orientation toward long-term investing and partly because these institutions ostensibly exist to make the world a better place. Until fairly recently, a number of well known private equity firms looked down their noses at funds of funds, because these investors were seen as opportunistic creatures that contributed nothing other than capital.

Good behavior. Limited partners that complained, needled and balked during the hard times of 2000 to 2003 may find themselves uninvited to follow-on funds. Some high-networth individuals have gained a reputation for asking too many unpleasant questions.

Discretion. Sadly, the so-called Freedom of Information Act (FOIA) battles currently being fought in many US states are leading some GPs, especially in the venture world, to deny access to those LPs subject to disclosure. One venture capital professional says that most VC fund partnership documents now require investors to certify that they will not be subject to disclosure rules.

Diversity. A private equity firm that gets most of its capital from public pensions may want to broaden its base to include endowments, banks and funds of funds. A firm built only on US money may find attractive any LP that isn't from the US.

Strategic considerations. A bank may gain a large allocation to a buyout firm because it could be a preferred lender. A fund of funds may gain access because it has a history of smart co-investing.

Celebrity. Two Bay Area funds of funds – Northgate Capital and Champion Ventures – gain access to top firms in part because their capital comes from professional football players and other professional athletes, who offer to mingle with start-struck GPs and portfolio company managers. Brent Jones, a co-founder of Northgate who retired from the San Francisco 49ers in 1997, recently told website NFL.com: “Getting access to the ten best venture capital firms is nearly impossible. Being an athlete gets you maybe a foot in the door… Otherwise, it is our business acumen.”

Lineage. Having a prominent father at a top-tier venture capital firm is being sold as a form of access by some venture funds of funds. San Francisco-based Darwin Ventures is co-led by Frank Caufield Jr., the son of Kleiner Perkins Caufield & Beyer co-founder Frank Caufield Sr. London- and Baltimore-based Montagu Newhall Associates is led by Rupert Montagu, son of Abingworth founder Anthony Montagu, and Ashton Newhall, son of New Enterprise Associates cofounder Charles Newhall. Both groups say the family connection is less important than broader industry relationships. However, adds Newhall, “everybody recognises the name of the game is access. How you get there is less of an issue.”