Even among the best-informed trustees, a lack of knowledge about the intricacies of private capital markets is entirely understandable. As pension analysts Keith Ambachtsheer and Don Ezra have observed, most governing fiduciaries are generalists and do not functionally require this expertise.Endnote 148 Moreover, private investment activity is outside the experience of many fiduciaries comfortable with public securities exchanges. Lack of familiarity can lead, however, to misconceptions - for example, about incidence of SME failures, deal write-offs or cyclical ups and downs in markets, all of which can be anticipated in a long-term portfolio of balanced risk. This may prevent discussion of the actual costs and risks of pension exposure to alternative/non- traditional assets. Consequently, trustees may be skeptical of proposals to create such exposure.
Why are pension funds the top-ranking source of supply to private equity and mezzanine financing markets in the United States? One explanation pertains to the series of organizational and technical innovations, some of them pension-led, that have helped compensate for market inefficiency. These have permitted the obtaining of superior risk-adjusted returns that justify pension participation.
One sign of evolution in American private equity markets since the 1980s is the rapidly growing body of independent advisors, agents and intermediaries available to both the demand and supply sides. The Federal Reserve System reports that these have proliferated due to a larger population of new investors, partnerships and pools that, in many instances, have not had direct dealings with one another. Advisor-agents provide this networking. Such also respond to the needs of participants to render the securing market information more cost-effective. For pension fiduciaries in the United States, one of the most significant professions added to the advice and agency field has certainly been the colloquially-termed "gatekeeper."
In essence, gatekeepers offer one-stop-shopping for pension funds seeking to acquire intelligence about diverse private equity investing options, to find and allocate assets to the specialists with the best track records, and to keep costs low. Some gatekeepers function primarily as consultants. Their first aim is to understand the stated criteria of pension funds and other investors. With this criteria, they then proceed to search out, screen and compare pooling vehicles (e.g., limited partnerships) and specialty managers on behalf of clients. They may also support the due diligence process. Once pension commitments are made, the gatekeeper may then undertake performance monitoring and evaluation, based on market benchmarks, and submit regular reports to fiduciaries. A well-established firm that provides clients with these and other advisory services, using a permanent database, is Cambridge Associates.
Other gatekeeping outfits are more interventionist. Some assume complete responsibility for negotiating the partnership terms and conditions and may, in such cases, retain strategic, discretionary authority over pension assets. Indeed, gatekeepers like Abbott Capital Management perform the tasks detailed above for direct dispersal to selected limited partnerships on behalf of fund-of-funds (see Of Pools and Pooling) . The same is done for the individual portfolios of very large pension funds through separate accounts. In some accounts, large clients prefer to retain a final say in major allocation decisions through a formal approval process.
Other advisors and agents in American private equity markets have emerged to help SMEs obtain financing from pools or directly from institutional investors. This largely involves collecting private, proprietary data for profiles of the former and distributing these to the latter. Some will also handle negotiations. Still others exist to attract supply to limited partnerships. Each of these three groups, and especially gatekeepers, have assisted pension funds to avoid pitfalls, reduce operating costs and gain clarity in navigating these otherwise opaque market environments.
Sources: Cambridge Associates, Brochures, 1998; US Federal Reserve System, The Economics of the Private Equity Market, 1995; CLMPC interviews What's an ETI?