The rapidly unfolding pay-to-play scandal is bad news for private equity generally, but very worrisome for placement agents and investor relations professionals, who by the time this depressing story has played itself out may be asking where they can go to get their reputations back.
Within the private equity industry, placement agents are known as integral to the asset class, and providers of valuable services. But anyone looking in from the outside right now might have a hard time distinguishing between the “placement agents” described in the New York State Common Retirement Fund scandal coverage and the entirely legitimate population of placement agents insiders know, love and pay.
Unfortunately, the negative headlines will likely multiply from here. You can be sure that every public pension that may have had dealings with Henry Morris and Raymond Harding – two New York political operatives at the center of the scandal – is now chasing a trail of papers, emails and fees to determine whether fiduciary integrity has been compromised. In the process, many will likely uncover other go-betweens who provided services, or attempted to provide services, similar to those offered by Messrs. Morris and Harding. Placement agents and GPs know this will be the case, because they run into these solicitous “consultants” all the time while on the fundraising trail.
If one describes the placement business merely as the brokering of investment capital for a fee, then the gradations among the many fundraising service providers seems hazy indeed. But real placement agents function in ways that dubious pension pals – call them phony placement agents – do not, cannot, will not:
Real placement agents do serious due diligence on the GPs they represent. They take on serious risks of time, money and reputation when they agree to help a GP raise a fund. Therefore placement agents will say “no” to most assignments, and perform heroic feats of background and performance testing on the funds they do represent. For GPs, being represented by a reputable placement agent is itself a badge of honour because LPs take confidence the GP team has already been well vetted by seasoned experts. Phony placement agents aren’t interested in the merits of the fund, other than its willingness to pay a fee.
Real placement agents will make clear to the LP the only reward for committing capital to the represented fund is the (hoped for) investment performance. Phony placement agents either insinuate to or promise the LP rewards beyond the performance of the fund, including, in criminal cases, personal economic benefits.
Real placement agents offer GPs introductions to a valuable network of investors along with articulate advocacy for the investment opportunity, structure the relationship such that interests are aligned, but do not promise results from any particular LPs. Phony placement agents guarantee capital commitments from specific LPs in exchange for pre-negotiated fees or revenue sharing.
Real placement agents are transparent to their clients and to the LPs. Phony placement agents demand fees be paid in secret.
Real placement agents sometimes specialise in certain regions or types of LPs, but are very knowledgeable about both the GP investment opportunities and the portfolio dynamics of their LP network. Phony placement agents are chummy with (often underpaid) people at specific institutions and pass this off as domain expertise. They know people and interpersonal motivations, but pay no heed to official investment policies.
Real placement agents help GPs raise capital. Phony placement agents attempt to obstruct GPs from raising capital unless a toll is paid.
As pension officials, prosecutors, lawmakers and mainstream journalists attempt to make sense of the alleged pay-to-play scandal, it would be to the benefit of the private equity industry if they understood that not all placement fees are created equal.