To the sceptics, placement agents are now on the wrong side of the private equity industry’s evolutionary journey: they were highly useful in the 1990s and 2000s when general partners’ investor relations departments were small or non-existent, but are no longer necessary – for the bigger beasts, at least – in an era when GPs have substantial and skilled investor relations teams.
But Jeff Eaton, Houston-based worldwide head of origination at Eaton Partners, one of the world’s largest placement agents, rebuts all notion that they are no longer necessary. He acknowledges that the very largest firms, such as The Carlyle Group or The Blackstone Group, do not generally engage them. But the rest of the industry, including the huge firms in the next tier down, still have a use for them, says Eaton.
He cites one example from a few years ago, of “a big, established growth equity manager” which had never used an agent. But when the partners decided to raise a credit fund from the same clients as before they ran into trouble. “They spent about six months on their own, and didn’t raise a dime.”
When they turned to Eaton, “we were able to tell them, ‘Your current structure and fees aren’t what the market will accept. On top of that, you’re talking to the wrong person at Mr Limited Partner. You have to call the credit or fixed income person, not the private equity person’”.
Eaton says the fund ended up closing above its target of about $500 million.
Andrew Bentley, London-based partner at the placement agent Campbell Lutyens, echoes Eaton’s position. “Large GPs with well developed in-house fundraising teams typically raise funds on their own, but take on placement agents in some cases,” he says.
This can apply not just to new strategies, but also to cases where “they have multiple different funds coming to market at the same time and want to ensure sustained focus on non-flagship funds”.
This argument is confirmed by an IR executive at a large European private equity firm.
“Placement agents can be useful for regions where you don’t have a presence and relationships, and don’t intend to build a team, or for a new product you’ve never sold,” he says. His firm has used an agent for a niche credit fund, while eschewing them for other funds.
However, both placement agents and general partners agree that the core market for placement agents is the mid-market, where investor relations departments are smaller.
Even in this segment, the use of placement agents is far from universal. An investor relations specialist at a US mid-market GP says his firm does not hire them.
“For our recent fund, we focused our marketing on investors who were in our previous fund, and people who had proactively reached out to us before we launched our latest one,” he says. “We were oversubscribed, so we didn’t really need an agent to assist us,” a fact he attributes to the strong returns of the last fund.
Placement agents are increasingly being squeezed out by the general trend for larger IR departments. The standard justification for placement agents used to be the cyclical nature of fundraising: why should a general partner hire someone internally to fundraise when they had nothing left to do after a final close? This logic is no longer as strong as it was.
“Over the years GPs have come to realise that if they are big enough, they need somebody who works in client services full time,” says the IR specialist at the European general partner. “Taking care of clients is a full-time job. You have to respond to enquiries, do reporting and visit them. You’re not just fundraising, but keeping people happy along the way, in between fundraises.”
Responding to the squeeze from internal IR people, placement agents are increasingly trying to offer more sophisticated services. Most are striving to expand beyond the “Rolodex model”, based on providing introductions to suitable investors, to a broader service that includes advisory work. This encompasses everything from creating marketing material to advising on fund liquidity solutions for existing LPs. In a world where the number of GPs is growing faster than the number of LPs, many GPs want advice to keep ahead of their peers.
This strategy also has two advantages for placement agents.
The first is that it plays to their core strengths. Painters and decorators often make excellent arbiters of taste in wallpaper because they put so much of it up, and the same dynamic holds true of placement agents.
“A good placement agent might have raised for as many as 40 different funds in the past six months,” says the European IR specialist. “They know what works and what doesn’t, so it can certainly be worthwhile to use an agent to check that your messaging is on the right track.”
The second advantage is that placement agents can charge more. They tend to demand about 2 percent of funds raised for the full advisory plus introduction service, compared with about 1 percent for introduction-only.
Some GPs baulk at these fees – particularly those that think they have a fund that should be able to sell itself.
“A great fund is a great fund, so whether it has a placement agent to sell it or not, it will always be all right,” says the European IR specialist. “A bad fund is a bad fund, so it won’t be a runaway success even with a placement agent.”
He does, however, acknowledge that for a “middle of the road” fund, “a placement agent could make a difference between a really successful fundraise and a so-so fundraise”.
However, GPs broadly confirm placement agents’ contention that 2 percent is a reasonable rate, because the work requires a level of skill and a depth of contacts that are hard to replicate.
James Moore, London-based global co-head of UBS Investment Bank’s private funds group, one of the largest placement agents, cites the example of its work for NorthEdge Capital, a lower mid-market private equity firm based in Manchester and Leeds in the UK, when raising their maiden fund. The team was highly experienced. However, NorthEdge “came to market at a time when there was barely a heartbeat for a first time manager in Europe”, says Moore.
UBS’s solution was, initially, to sell the idea of investing in the region. “It was critical for investors to understand the competitor set, why the north of England was such a compelling part of the market in terms of dealflow and pricing, and the sort of businesses that private equity could buy into,” says Moore.
The second step: “If investors were convinced that the north of England made sense, we had to show them that NorthEdge was the best entry point into that market.”
By April 2013 it had achieved a final close on its maiden fund at the full fund size of £225 million ($318 million; €284 million).
Moore did not disclose the fee charged. However, assuming it was around the industry average, NorthEdge would doubtless have been a lot happier paying 2 percent of £225 million than zero per cent of nothing. ?
FUNDRAISING: RESISTING DIGITAL DISRUPTION
“Hi. Congratulations on the big exit. When is your next fundraising?” reads a fictional message from a limited partner on a promotional video for Palico, an electronic platform designed to match limited with general partners, as well as providing them with extensive data on each other. “Thanks. It’s a year away but let’s have a coffee next time you’re in NYC,” runs the general partner’s reply.
It sounds like an easy way for LPs and GPs to make contact with each other, and it is certainly growing in popularity. Antoine Dréan, who set up Palico in Paris in 2012, says its membership includes 5,900 LPs, 9,108 GPs and 12,781 service providers. He estimates that overall membership has doubled or tripled over the past year.
Can electronic platforms provide an alternative to hiring placement agents, for those GPs who worry that they can’t fundraise on their own?
Placement agents acknowledge that they could threaten the “Rolodex model” of introduction-only business. It is, after all, so much cheaper. Placement agents charge 1 percent of funds raised, for introduction-only assignments (although this type of mandate is becoming less and less frequent). Palico bills LPs and all other members $499 a month for full access.
“Electronic platforms have not yet had any significant impact on our business,” says Andrew Bentley, London-based partner at the placement agent Campbell Lutyens. “GPs have had contact details and summary information for LPs for many years, but this is only a very small part of what placement agents provide to GPs.
“Fundraising is a very personal business for both GP and LP – based on judgment as much as, if not more than, assembled facts.”
The platforms may even prove to help more than harm placement agents. Many have signed up as members – arguing that however good their contact list is, there is always someone new to know. Dréan of Palico notes that most GPs who use the site still employ agents as well – including Triago, a Paris-based agent of which he is chairman and majority shareholder.
Electronic platforms may even open up a previously untapped market for placement agents: the wealthy but not super-wealthy private investor, with $100,000 to $200,000 or so to invest in a private equity fund. This is the target market of iCapital Network, launched in New York in 2014 with financial backing from several agents, including Eaton Partners, which are using it to place funds with the wealth managers who access the site.