When Coller Capital closed its record-breaking fourth secondary fund on $2.5 billion in 2002, it was a very nice payday for its placement agent too. According to market sources, CSFB Private Fund Group, which had advised Coller, collected $30 million in fees – or 1.2 percent of the fund's total.
Nice work if you can get it – although that's an increasingly big if. Being a private equity placement agent is getting tougher, as general partners are becoming more questioning of the value proposition agents offer.
There are several reasons for this. For one, mature general partner groups preparing to organise a follow-on partnership – traditionally an agent's most attractive type of client, alongside first-time (often spin out) funds the market wants to back – can draw on welldelineated franchises amongst the buy side. Such groups will be confident that they can round up much of the capital they need for their new pool themselves – especially if they have set up, as many now have, in-house fundraising and investor relations capabilities.
What doesn't help either is the fact that many limited partners now know private equity and its protagonists much better than they used to. They too are thus less dependent on a third party holding their hand during the fund selection process. (Next time you hear a placement agent lament that no-one will be impressed with their Rolodex anymore, you'll know why.) Indeed, if buyers and sellers are increasingly comfortable talking to each other directly, a placement intermediary looks in danger of being squeezed out.
As a result, the kind of work available to placement agents is changing. You increasingly hear of them acting for a general partner on an “advisory basis”, as opposed to executing the “full” placement mandates that used to be their bread and butter business. Exactly how the two roles differ tends to vary. Suffice it to say that advisory work, where the agent is paid a flat fee, is likely to be much less lucrative than the traditional deal, where the agent is entitled to a typically significant percentage of all capital he helps raise.
What is more, as quality fund placement work becomes more difficult to find, the fight for a piece of it is getting tougher. According to reports from the trenches, the placement industry is in the middle of a price war. Shell-shocked combatants are telling tales of recent pitches for assignments on terms that they thought were already “predatory” – only to see the deal being handed to a rival who promised to charge half that. “Some of the pricing we have seen of late is crazy,” laments a veteran placement pro in the UK.
Rock bottom pricing is a problem, especially for the investment banks. A captive placement business within these organisations has substantial overheads that are tough to cover in today's highly price-sensitive environment. Smaller, independently-owned boutiques have an advantage here. “No wonder these guys dominate the market now,” says one investment banker, shedding a tear for the (not too distant) days when the likes of Merrill Lynch, CSFB, UBS and Citi practically owned the market.
But if the current trend continues, even the leaner, meaner outfits will soon be feeling the heat. Predictions that the number of competitors in the market would diminish are yet to come true, but a shakeout seems increasingly inevitable.
Indeed, fewer competitors will be one factor taking some of the pressure off the industry. Another will be if placement specialists can adjust the way they operate to the changing requirements of their clients.
Many placement agents are already working from the premise that by the time a fundraising is officially underway, most of their input should already have happened. They aim to team up with a new client as early in the process as possible, helping to devise a strategy and focusing on the fund's positioning and pre-marketing. “Don't pay me for who I know, pay me for helping you approach them effectively and at the right time” is their message to GPs. The challenge is to translate this into a sustainable business model. A wave of new private equity funds is expected to hit the market in 2005. This bodes well for placement specialists. But only those whose current soul-searching results in new ways of adding value in a changing market will be able to take full advantage of the opportunity. And price-cutting rarely grows a business.