As the private equity sector has grown in leaps and bounds over the past two decades, placement agents have followed in its wake. They are now a common enough sight: according to a recent Preqin survey, more than half of the GPs closing funds in 2016 used a placement agent.
In the early years of private equity, placement agents were often just human rolodexes working solo. Nowadays, most private placement work is undertaken by a variety of specialist firms, as well as specialised placement divisions within bulge-bracket banks and full-service brokerages.
Aside from their basic function of introducing GPs to suitable LPs, most placement agents have built themselves into broad-scope marketing advisers. Their services include honing the GP’s offering materials, developing its narrative, advising on brand identity, and conducting their own verification exercise on the team’s track record to support the marketing. In a few cases, the agent may stay engaged post-closing to help on the investor relations front.
With so many managers competing for capital in the global PE marketplace, and LPs increasing their allocations to private equity and other alternative investment classes, institutional investors are doing ever more due diligence on GPs. Investor due diligence questionnaires are often long and time-consuming to complete, and it’s fast becoming a critical service performed by placement agents. Responding thoroughly and quickly to investor queries is now a key driver of a successful fundraise.
Generally, placement agents are remunerated according to the success of the fundraise, but commission rates vary according to the size of the fundraise and the relative ease with which the placement agent believes that the fund can be sold to LPs.
GPs that are relatively new or haven’t yet established a solid track record or are raising a relatively small fund can expect to be charged a commission of around 2% of total funds raised (i.e. not just those raised by the agent), payable in instalments over four to eight quarters. Established GPs sporting a history of high performance and raising a big fund are in a much better position to negotiate better fee terms with placement agents, because they will be judged to be an easier sell.
Invariably, there is a “tail” obligation, which allows the agent to charge commission on money raised for some pre-agreed period after the termination of its engagement – this is to protect the agent if it is removed shortly before closing after having completed the bulk of its contracted work.
Longer-term consulting-type services will usually be performed on a separate retainer, which may be partly set-off against the percentage commission.
Although formation and marketing costs are typically paid by the fund post-closing, it is rare for the GP to be able to recover placement fees from the fund – so each GP will need to balance the expense of using a placement agent against its fundraising prospects without an agent.
Raising a fund is a difficult, resource-intensive and time-consuming activity even when the financial markets are bullish. The challenge is seldom greater than for those raising their first fund.
A lot of first-timers spring out of established PE firms, where their main job would usually have been as deal-doers and financial engineers. But deal-making is a different business to fund marketing and investor relations, and many executives won’t necessarily have spent much time developing close relationships with their old fund’s LPs.
But it’s not just newcomers. Preqin’s published research suggests that even established PE firms are more likely to exceed their fundraising target if they field a placement agent. If a GP has a small investor relations department, or none at all, it will probably be cost-effective to outsource much of that work to a field specialist, rather than let it distract them from their existing fund management obligations. GPs generally only go to market every three to five years, whereas a good placement firm will undertake multiple fundraising mandates every year – so it will simply know the market better.
GPs should undertake their own due diligence on placement agents before hiring one. Factors to consider include the agent’s specialisation and experience, the LPs they appear to know well, the significance of a particular GP client relationship among the agent’s roster of clients, and what their salesman’s patter is like.
Get references from the agent’s former and current clients, try to establish their conversion ratio (i.e. how effective he is at parlaying his rolodex into meetings and then subscriptions), tease out their expertise and network in different countries and among different categories of investor – pension funds, HNWIs, etc.
It is often a matter of picking horses for courses. For instance, it’s not unusual when an established firm is trying to crack an unfamiliar, new LP market (e.g. the Middle East or the United States) to hire a local agent to quarterback the effort.
Good agents will thoroughly vet their GP applicants before accepting a mandate. Agents can only take on a certain number of fundraising mandates per year, and, like any professional, they will want to make their time count. An agent wants to work with fund managers who know their stuff, have a good story to tell, and tell that story well – all of which will make it easier to market their fund to LPs and thus achieve closing and placement commissions.
So the GP team needs to put significant time and effort into making their ‘pitch’ to the placement agents on their shortlist.
An agent’s reputation is exposed to long-term risk from its GP clients and their funds. A fund that does badly might make LPs less likely to do business with the agent who originally marketed it to them as the best thing since sliced bread. A few placement agents even require their own senior staff to invest in their GPs’ funds, as a way to improve alignment with both GPs and LPs. (It’s also a clever way of gaining exposure at a discount to alternative funds.)
The GP’s own networking is also crucial. If a GP (particularly a new one) already has a cornerstone investor who is willing to back them with large dollops of cold, hard cash, that GP’s fund is a lot more likely to achieve lift-off when the agent eventually chaperones it onto the broader market. Money, like misery, loves company.
In some jurisdictions, like the United States, only a registered broker-dealer can act as a placement agent in most circumstances. As such, GPs should be careful when using unlicensed “finders” who may provide introductions for a charge but will generally steer away from other marketing assistance. There have also recently been a number of ‘pay to play’ scandals in the U.S. that raise even bigger (regulatory or litigation) risks for both GPs and agents.
Although their ultimate aims are the same, a placement agent is not an underwriter. The latter will normally commit to purchase with its own capital any securities that are not subscribed in the offering. A placement agent would work on no more than a ‘best efforts’ basis – he’ll do his best to find and persuade LPs to subscribe, but ultimate responsibility remains with the GP. A highly reputed placement agent will open doors, but can’t guarantee commitments. Even if management hires what they believe to be the world’s best placement agent, the marketing effort is still going to rely heavily on the team’s ability to construct and defend their investment strategy and experience in granular detail.
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