It was several weeks into the covid-19 lockdown when Gabrielle Joseph noticed something unusual. The head of due diligence and client development at Rede Partners started receiving calls from well-known European mid-cap private equity firms, sounding her out on hiring her firm as a supplementary adviser alongside their in-house teams. The problem was that they would likely be coming to market at the same time as her existing mid-cap clients.
“It was a painful, I-can’t-believe-we-had-to-turn-down-this-GP situation,” she tells Private Equity International. “We just can’t do it because of conflicts,” she had to tell her prospective clients.
Rede is not alone in turning away business. In conversations PEI had with 12 placement agent firms, all but two say they are the busiest they have ever been, overworked, juggling new mandates, secondaries opportunities and advisory work.
“The market has never been this congested and competitive and I don’t think that’s going away,” says Warren Hibbert, co-founder and managing partner at Asante Capital Group. “It’s not a covid thing. It’s the cadence of fundraising cycles today, coupled with the extreme bifurcation between the haves and have-nots. The intensity of the competition is just higher than it’s ever been, combined with a significantly higher performance benchmark.”
Driving this is a private equity fundraising market that is bursting at the seams. The asset class broke records in the first half of 2021 with $415 billion of capital raised – its highest level since 2008 – according to PEI data. That is a 53 percent rise from the same period last year, as recovery from the pandemic, LP demand and a rebound in deals bolstered activity.
These figures bely a harsh truth: emerging managers who can’t meet prospective investors in person – and those who aren’t deemed “top-quartile” teams – are finding the going much harder as investors flock to larger, brand names perceived as safer bets or prioritise existing relationships. Case in point: the average fund size rose to $678 million in H1 2021, up from $591 million in full-year 2020.
Amid this backdrop, many placement agents have had to transform their businesses into financial Swiss army knives to adapt to market conditions. Some have fallen by the wayside. Last year saw the smallest number (3,435) of FINRA-registered firms in the past five years, according to the Financial Industry Regulatory Authority. The annual total has fallen every year since 2016 and is down about 10 percent from five years ago, FINRA reports.
However, firms that have expanded their menu of services say they can hardly keep up with demand. Not only are they fielding more calls for help raising primary funds, they are also engaged in secondaries advisory work and busy raising capital for direct deals.
Established managers: Help!
After years of seeing bread-and-butter fundraising assignments dry up as large PE firms built in-house investor relations teams, placement agents are now seeing those same firms ask for help once more. The consensus among placement agents PEI spoke to is that established GPs have enlisted more fundraising help in the past 18 months.
“GPs that would never have approached us – alarmingly large GPs with successful brands – have come to us and said, ‘We’ve got eight people internally, we’ve got 500 LPs, but we are worried we are not going to get the numbers we want,’” says FirstPoint Equity co-founder Julian Pearson.
This type of advisory service, which is often a “stealth assignment”, typically overlays the GP’s fundraising programme and entails going line by line to make sure the placement agent fills the positioning with the right LPs and provides pinpoint accuracy to the GP.
“The size and quality of established GPs – looking for help in bespoke ways, whether in regions, teams or positioning of new products – has dramatically increased,” Pearson says.
The reason: some sources of capital have greatly reduced. In a world without travel, US LPs that would traditionally look to find the best in breed in Europe or Asia are just looking locally. On top of that, the usual carrots of early-close discounts or co-investments have been awash. “Co-investments were quite an exciting offering and now they’re just 10 a penny,” Pearson notes.
Strong demand has some placement agents putting more focus on manager selection. “In the last year, cases that were more borderline for us, we no longer touch,” says a director of an Asia-based placement firm. “In the past, maybe the GP’s story is difficult and can be explained; maybe the target is smaller and fees are smaller, therefore we can think about how to structure it. That tolerance is a lot lower now.”
Since the availability of capital has changed, larger GPs that typically relied on in-house investor relations have turned to placement agents to help raise funds. A Hong Kong-based placement agent cites an example of a US-based GP with a 30-year track record that had never used an agent. “They came to the market at the end of last year amid the pandemic and had an IR team of four people that covered the globe. That’s obviously not enough in today’s world and they came to us for assistance. Three years ago, they would’ve come to market and raised that fund by themselves, no questions asked.”
Three placement agents we spoke to note a similar shift in the new mandates they’ve taken since the start of the pandemic. Where previously new mandates were somewhat split evenly between first-time funds and established managers, the latter have made up the lion’s share in the past 18 months.
“In the current environment it’s very difficult to raise capital for emerging managers, so it becomes all about established managers,” says the Hong Kong-based placement agent. “Out of 10 clients in the last year, only one is a first-time fund, and everyone else is a Fund III or IV-type of situation.”
The agent says investors are looking to place capital predominantly with brand-name managers and those with whom they are already familiar. This has meant having to work twice as hard to achieve half as much. “The margins aren’t what they used to be – it’s not a great environment from that point of view,” the agent says.
Primary revenue from secondaries
The secondaries market has produced a growing revenue stream for placement agents, particularly in GP-led secondaries.
Placement agents/advisers are essential on almost every GP-led given the significant conflict of interest involved in a continuation vehicle or tender offer process, says Asante’s Hibbert. “It’s very rare any GP would opt for a DIY approach – it’s far more complex, given the inherent conflicts, to in-source this function than for a primary fundraising, for example,” he says.
London-headquartered Asante has built out its secondaries advisory capabilities since 2017 and has grown the team to 12 professionals. Rede’s former head of secondaries Yaron Zafir joined the firm as senior adviser in June 2020. A year before, it hired Graeme Gunn, founder of the secondaries team at SL Capital Partners (now Aberdeen Standard Investments) as a senior adviser and Jonathan Graham, previously a director of secondaries at DWS. Asante has advised on an additional $3 billion of secondaries transactions in the last year, up from $2 billion in 2019, according to its website.
Of the $48 billion of secondaries volume in the first half of the year, fully 60 percent was GP-led, a 383 percent increase in volume from the same period last year, according to a report from Jefferies. Total secondaries volume grew 166 percent year-on-year in H1 and is on pace to set an all-time record.
Continuation funds are a key part of the story, making up 85 percent of GP-leds in the first half of 2021. Nearly half of those, 45 percent, were single-asset deals. “We are witnessing a ‘new normal’,” Jefferies says in the report. “GPs continue to creatively unlock value by accessing follow-on capital and identifying and holding trophy assets for growth and expansion.”
The types of deals that are getting done have a much bigger revenue pool than they used to have. In addition, while GP stakes sales in general haven’t been a profitable business, GP-led secondaries have been, according to the Asia-based placement agent.
While intermediating LP portfolio secondary sales typically scores in the realm of 50-80 basis points, below the typical haul for primary fundraising, GP-led transactions can be worth 200-250bps to intermediate and can take half the time of a primary fundraise, agents note. The opportunity for placement agents is poised to expand further as entrants in real estate, infrastructure and credit secondaries are expected to attract intermediaries to those asset classes.
A direct boom
Fundraising for direct deals has been a particularly bright spot for some placement agents. It was one of Triago’s biggest growth engines in the past year, driving higher revenues than traditional funds for the 29-year-old advisory firm, says co-head of Americas and managing partner Matt Swain.
Triago is advising on up to 20 direct deals this year with revenues growing nearly 100 percent in this part of the business, Swain notes. To keep up with the growth, Triago has expanded its direct fundraising team to five professionals in less than two years. “It has historically been difficult to find the right capital partner for directs, but we’re now having direct deals that are 8-10 times oversubscribed,” Swain says.
One example is Project Icebox, the third pre-fund platform deal Triago advised on for New York-based Ronin Equity Partners. Capital for the deal was lined up in eight days and was backed by a consortium of investors led by Northleaf Capital Partners. That transaction, which was 9.5 times oversubscribed, was done in about 60 days from start to finish.
That LPs are no longer as passive as they used to be and want to get closer to the assets that they’re investing in has also meant greater interest in independent sponsors, notes Swain.
“LPs want to look through and see the exact pool of assets they are buying into, or even underwrite individual assets,” says Swain. “They have become sophisticated enough to do a lot of the underwriting on their own, which has made unique pools of capital more accessible for different GPs.”
As the lines get increasingly blurred between direct transactions, co-investments and secondaries – especially around GP-led restructurings – placement agents are finding themselves in unique positions, by the nature of their day-to-day business and relationships, to act as the link between sellers and buyers of those assets.
The skillset required for fundraising has evolved, agents note, and they are often dealing with three different players: the sponsor, the capital provider and at times directly with the seller.
Adapting to Zoom
Rede Partners put on a virtual conference called RedeConnect over two days in April. The event comprised close to 100 separate 45-minute GP roundtable discussions between 28 of Rede’s GPs and more than 250 LP attendees.
Gabrielle Joseph, head of due diligence and client development at Rede, says the event was born out of a need to make up for and match some 300 LP-GP meetings the team brokered in an industry event in Europe in 2019. Since in-person gatherings had not yet returned this year, Rede took matters into its own hands. The result was three times more LP-GP interactions, with one GP receiving a RedeConnect-introduced commitment six weeks after the event. Several more potential commitments are pending for other managers. The firm’s clients have also requested RedeConnect become an annual event.
“These are the things we can do with technology now where we can elevate the business,” Joseph says. “It’s different when you arrive in a roadshow with a bunch of people in suits and with a placement agent in tow. It’s very intense.”
With small group sessions over Zoom, people do not feel that they are wasting time, she adds.
Placement firms have staffed up as they expand their product offerings and senior managers are in high demand. In the past three years, FirstPoint’s team has grown from a few partners and vice-presidents to include senior advisers including Bob Lang, a 20-year veteran at Cambridge Associates.
Lang joined in May to focus on sustainable real assets business development and client advisory services. Dale Hunt also joined as senior adviser in July and was most recently managing director for private equity at Ascension Investment Management, the largest non-profit Catholic hospital system in the US with $35 billion in assets.
Pearson notes that FirstPoint’s “senior heavy” model is a function of covid-19. “You can’t travel, so LPs don’t want to have calls from salespeople but conversations with people with real investment experience and sector experience,” Pearson says. “I certainly think you need four times the senior manpower in fundraising than you did five years ago.”
While it maintains its focus on LP portfolios on the secondaries side, Triago is also growing its team focused on complex GP-leds, Swain says. “LPs want to get closer to these assets,” he says. “Being able to buy into a continuation vehicle where you have one identified asset versus an LP portfolio with 100 different line items of funds is becoming more and more attractive.”
More change ahead
There is no doubt that the maturation of the private equity industry is leading to changes in the capital-raising landscape. From the level of competition to the need for differentiation and specialisation, the placement agent model – like the managers it serves – has reinvented itself to deliver above the mechanics of fundraising.
Yet while placement agents believe they have a vital role to play in the fundraising process, some think there is gap in the market for an investment bank that truly focuses on serving the needs of GPs.
“There’s a real inflection point for the placement agent model to shift and turn in an entirely different direction,” says Robert Brown, a veteran fundraiser who was included in the Rainmaker 50 – PEI’s list of the most influential fundraisers – having been involved in more than 180 fundraises, including TPG’s first fund and Silver Lake I.
Brown believes there is an enormous multi-faceted, multi-product set opportunity that can take the placement agent model forward.
“The concept of a placement agent, helping a GP raise a fund, is fine. But, the reality is what you’re doing is you’re serving an end customer – the GP who has a firm, which is made up of a series of funds. They all have payrolls to meet; they all have needs to finance their businesses.
“You can call somebody and get advice about how to raise a fund or whether you can do a continuation vehicle. But there’s almost no one who holistically sits down with the head of that private equity firm and says, ‘Let’s pick through all of the things that are on your mind, whether that’s new products, succession or the monetisation of franchise value within a GP stakes transaction.’”
In its report The Future of Private Equity: Five Predictions for the Next Decade, Rede forecasts the disappearance of the ‘blind’ element of the 10-year blind pool as GP-led secondaries rival sponsor-to-sponsor volume. The acceptance and growth of these transactions will create a paradigm shift in private equity, the firm notes in the report, which can only be a “good thing” for both LPs and GPs with increased options for investing.
In addition to increased adoption of virtual diligence processes, fintech and online fundraising platforms such as iCapital Network and Moonfare are disrupting the industry as more individual investors, especially developing sources of capital in Asia and the Middle East, get into private capital.
Placement agents we spoke to acknowledge that such platforms could be relevant in the future, but that all depends on how large the high-net-worth marketplace becomes. For now, no significant impact has been made, they say.
As the Hong Kong-based placement agent says: “It’s the difference between going to WebMD to self-diagnose and going to see a doctor. I like to think the placement agent is the doctor. If you look to invest significant amounts of capital, you will still need to speak to an expert to be correctly advised.”
Struggles in Asia
The pandemic placement boom doesn’t seem to have reached Asia-Pacific. Firms have been plagued by a string of senior departures over the past 18 months, with many of those executives moving in-house to GPs in need of investor relations staff with strong connections overseas.
Notable examples include Ian Bell, former head of Asia-Pacific for Evercore, who joined Apollo Global Management in August; Chris Lerner, former head of Asia-Pacific at Eaton Partners, who joined Chinese growth firm MSA Capital in October 2020; and Dennis Kwan, a former managing director at MVision, who joined Beijing-headquartered Harvest Investment Management last year.
With some placement agents potentially seeing their income diminished due to covid-19, the opportunity cost of moving in-house has plummeted. The allure of steady management fees and a taste of carry increased.
“A lot of business traditionally done in Asia has been on the emerging manager side,” says Niklas Amundsson, head of Asia-Pacific for Monument Group. “Whereas the global average is 50:50, in emerging markets that’s probably 80:20 or 75:25 in favour of emerging managers. If we come to a market where we can’t raise capital for emerging managers, 75 percent of the Asia advisory business model falls away and it becomes impossible to make money in this part of the world.”
Michael Baruch and Alex Lynn contributed to this report