A velvet rope keeps the wannabes waiting outside in the cold while a doorman reads the names of those who are deemed appropriate to enter.
The scene outside a popular nightclub comes to mind, but it could just as easily describe what pension funds and endowments face in trying to get into the private equity limited partnerships of their choice.
Private equity is hot, and the general partners that are in vogue are being selective about which investors they let in.
Getting there early by having an efficient approval process is one way investors are improving their chances.
Among the institutional investors working toward speeding up that process are the $80 billion California State Teachers' Retirement System, Sacramento; the $500 million endowment of Vassar College, Poughkeepsie, N.Y.; and the $70 billion Florida State Board of Administration, Tallahassee.
"In the natural course of events, as partnerships get raised more quickly, pressure is coming to bear on investors to react more quickly," said Philip Pool, managing director with Donaldson, Lufkin & Jenrette, a private equity placement agent. "'That leads to the need for limited partners to respond more quickly."
It also helps to be solicitous.
Relationship building critical
"If you are an investor building a portfolio and you know there are a few groups that you don't have a relationship with, you call them up and try to develop a relationship with them," said Gary Robertson, head of alternative investments with Callan Associates, a San Francisco-based consultant.
"During that process you try and find out what they are seeking in their client base," he said. "You let them know that you are not a contentious limited partner, that you are fair minded and interested in their process.
"It's a real anomaly in the investment management community," said Mr. Robertson.
Another way is to use connections.
"Typically, our recommendation to clients is to go through a professional private equity manager (gatekeeper) with access to top-tier partnerships, and give them discretion," said Mr. Robertson. "So, the gatekeeper can say 'I have $10 million and no approvals are required.'
"Speed and certainty is a competitive advantage in the market."
A look at the numbers shows why such tips are important.
Private equity fund-raising - including for venture capital, mezzanine and leveraged buy-outs - totaled $25 billion for the first half of 1997, compared with $8.6 billion during the same period in 1996, according to Asset Alternatives Inc., Wellesley, Mass., which tracks the industry.
In total, a record $32 billion was raised last year in private equity partnerships, according to Asset Alternatives. All expectations are for a record for 1997.
How investors are responding
But if some investors don't get into the funds of their choice, 1997 will be remembered as the year they were left outside looking in.
CalSTRS' trustees are considering altering the way the pension fund invests in private equity because general partnerships now have more sources from which to raise capital and are becoming less responsive to limited partners.
To speed up the process, the CalSTRS staff proposes that it, with assistance from Pathway Capital - the system's alternative investment gatekeeper consultant - be allowed to invest in partnerships without trustee approval, if it is in a related partnership with a general partner that the board previously approved.
And, Jay Yoder, investment analyst at Vassar, said: "I think that partnerships are definitely raising money over shorter periods of time, and it's due to the huge demand for them and other types of limited partnerships.
"I have definitely seen a compression of the time frame that these funds are open." Vassar College has 20% of its total assets in alternative strategies.
Mr. Yoder said he and his investment committee are beginning to look at ways to become more efficient at investing in private equity. One step they have taken is to ask Cambridge Associates, Vassar's Boston-based consultant, to pick up the pace of the analysis to help it make quicker decisions.
"Typically, the process we have here is time-consuming," he said. "We solicit recommendations from our investment committee members, our staff and our consultants, and we put together a list, set up a screening process, narrow it down, go back to the committee and follow up with an interview.
"That could take many months," Mr. Yoder said. And, the endowment's investment committee meets quarterly.
Vassar College hasn't missed any partnerships that it likes, but it is feeling deadline pressure from an energy partnership in which it would like to invest.
The endowment previously invested with SCF Partners, Houston. Mr. Yoder was notified earlier this month that a follow-on fund is open but plans to close by the end of the year.
"We no longer have the luxury of taking time and considering alternatives," said Mr. Yoder.
The Florida State Board of Administration has developed a strategy that it hopes will allow it to invest with general partners of its choice.
"We basically have a three-leg approach," said Irwin Loud III, portfolio manager. "One is to build a core portfolio of private-equity fund relationships.
"We will build it with two to three names a year until we get to 12 to 15, and we will re-fund them if they are successful," said Mr. Loud. "We will commit no less than $100 million each or up to one-third of the total fund."
As part of the core portfolio, Florida committed $100 million to Ripplewood Partners L.P. and $200 million to Hicks, Muse, Tate & Furst Equity Fund III L.P. this year; and $200 million to Carlyle Partners II last year.
"The second leg is a co-investment program" that LPNY Advisers, New York, will develop, said Mr. Loud. LPNY will handle co-investment opportunities that arise from Florida's core relationships, and establish co-investment ties with partnerships in which the board hasn't invested.
"It is a flexible program that will allow us to increase the amount of money invested without (greatly) increasing the number of relationships," said Mr. Loud. "It is starting off with $250 million and is designed to be upwardly flexible to $1 billion or more."
The third leg is a fund-of-funds that will be created next year. "It will be a captive structure of a farm team nature," Mr. Loud said. "The relationships will be smaller or much more specialized than we would deem appropriate for core relationships."
Florida's private equity investment process is internal, with the executive director pulling the trigger based on recommendations from the staff and the consultant.
Hamilton Lane Advisors, Philadelphia, the board's alternative investment consultant, provides staff support and relationship oversight and reporting, said Mr. Loud.
"They are not a traditional gatekeeper," said Mr. Loud.