Talk to one of the old hands in private equity who was involved in the asset class in the 1980s – in itself a sharp reminder of how far the industry has come in the past two decades – and it will not take long to be struck by its closely-knit nature at that time. People across private equity were familiar more with the individuals who ran particular firms than with the broader concepts of an institution’s strategic objectives. If you were a general partner (GP) running a private equity fund you were probably on first name terms with all of the limited partners (LPs) in your fund – and the fund raising process largely involved you, a telephone and your Rolodex. Your fund, by the way, would probably be called a small, mid-market fund today even though it was in its time one of the largest in the market. Capital calls involved another phone call or perhaps a fax and follow up letter. And you made sure that your LPs were given a good meal at the AGM where you’d also bring them up to speed on how the fund was performing.
Those were different times. Fast-forward to 2003 and you’ll find many of those old hands prone to fits of nostalgia for those earlier days that speak of simpler, easier times. Because today the task of managing a private equity firm is far more demanding – and the task of raising a private equity fund epitomises this.
Whereas the GP used to be able to assemble a small group of largely seasoned investors in private equity usually in a matter of months, that same GP will now be obliged to spend much longer, travel far further and finally marshall far more investors into their latest fund. Granted too, this new fund may also be five or even ten times larger than that first fund. But the whole task of raising a private equity fund has become much more rigorous. Some might prefer to call it much more professional, others impersonal. Whatever: it’s hard work.
It is also fair to point out that whereas a private equity firm’s funds would have grown exponentially in size from 1980 to 2000, now there’s an equal possibility that the latest fund will not be as large as the previous (although still markedly larger than that inaugural fund) – even though it probably took longer and involved more people throughout.
The importance of placement agents
Placement agents matter when it comes to raising a private equity fund. They mattered in the 1980s and 1990s of course but they matter even more today. Although some will still only grudgingly acknowledge this fact – including GPs who have paid millions of dollars or euros to an agent who has helped take their latest fund to a sizeable final close – few will deny that the rigours of today’s fund raising environment makes the placement agent’s contribution important and valuable.
For the general partner, a placement agent can help build a larger, more diversified group of investors in their fund, opening up new investors in different countries and/or from different sectors. The agent can also make the fund raising process more efficient, saving time and ensuring the effort is focused and the follow up diligent. And the agent can help initiate a dialogue with a broader community of prospective investors who – even if they don’t commit to this current fund – are valuable prospects for the next fund.
Investors in private equity funds arguably have less reason to thank an agent than a GP who closes its latest fund on or above target but LPs are nonetheless also increasingly prepared to recognise the value-add an agent can bring. Although some will be guarded in their praise, regarding any party who’s job it is to sell them a fund with some wariness, it is also the case that, for investors, the opportunity to examine a new private equity group chaperoned by a seasoned placement agent who has produced some substantive due diligence materials is attractive – and useful.
It should be noted though that not all funds use placement agents. Some see them as superfluous – given that for these GPs, their existing LP base shows every sign of providing the lion’s share of any new fund’s capital. And any new investors required have already made themselves known to the GPs. As may be guessed, this kind of scenario applies only to those funds with a strong and consistent track record. Other firms will prefer to build the fund unassisted at first, not bringing in an agent to help until there is a requirement to marshal further investors into the final close of the fund.
An in-depth assessment
Earlier this month the Private Equity Research Institute, which is being run by the publishers of Private Equity International and PrivateEquityOnline, released a market report dedicated to the role of the placement agent. This book was produced to offer some insights as to how placement agents work, who they are and how the rest of the private equity community regards them. Besides chapters that explore these themes the reader will find an extensive directory of placement agents as well as the results of a unique survey of GPs and LPs regarding their attitude to agents (including which firms in particular they rate highly).
Amongst the survey questions were several relating to how both LPs and GPs viewed the various contributions of the placement agent. Following are some of the findings to those questions.
1) For a GP, the key value add when using a placement agent remains meeting new prospects [to see the survey results, please click on the chart]
A growing number of placement agents have become increasingly keen to emphasise the multi-facetted nature of the services they offer, with several wanting to accentuate inputs that range beyond the orthodox task of introducing GP clients to their investor contacts. Some will play up the contribution they can make to the preparation of fund raising and related presentation materials. Some will highlight how they can assist during the due diligence process when prospective investors are poring over the firm. And some will want to formalise an ongoing relationship with both the GP client and its LPs by wanting to play a part in the investor communications that the GP undertakes (often the agent will urge the GP to include investors who didn’t commit to the fund to be included in this process to keep their “warm” for the next fund). Although these are all valid features to what a placement agent can deliver, the above result would suggest that many GPs still regard the placement agent in a one dimensional way: their job is to arrange meetings with new prospective investors. This was the head-and-shoulders first choice for GPs. The next three categories they could vote for are all quite closely ranked and it’s noteworthy that they all are relevant to the marketing and closing of the fund: ongoing IR involving the agent after the fund has closed comes in a distant fifth place.
2) The placement agent helps the GP to see a greater number, and a greater variety, of investors
When the survey focussed on which criteria that the GPs used when opting to use a placement agent, it soon became clear that the private equity firms were increasingly conscious of the extra effort that was now required to raise a fund. Fund raising is now a much longer road, requiring more prospects to be seen, more countries visited, more time being spent on due diligence and more investors being negotiated with as confirmed commitments are sought. It comes as no surprise therefore that 56 per cent of the GPs chose one of the following two factors as being most important when deciding to use a placement agent: the wish to access a new type of investor that the agent knows or the plain fact that the tough fundraising environment meant that more investors had to be seen. Two related benefits then capture just over 20 per cent of the votes apiece: the GPs wish to minimise the opportunity cost of having deal-making GPs embroiled in fund raising for too long a period and the interest in tapping new investment capital in countries outside the GPs usual (i.e. domestic) orbit via the placement agent. Unsurprisingly perhaps less than 3 per cent of the GPs felt that the main reason to hire a placement agent was because it was more cost effective: most assuming that the circa. two per cent charged on capital raised by the agent making this a remote likelihood (although putting a value on the time lost to fund raising by a senior GP in the firm could give more partners pause for thought on this).
3) Track record is the most important determinant amongst GPs when selecting a placement agent
In this question the GPs were asked to rank which of the five most commonly encountered capabilities they sought in an agent and it is notable that the track record of the agent was ranked as the most important. Although many agents will bridle at the phrase “you are only as good as your last fund” when applied to their own fund raising activities, this result would suggest that prospective clients of theirs will be paying very close attention to which funds the agent has represented – and with what success – in the past. The second most important factor is a reminder that the placement of funds is still very much a “people business”: GPs want to know that the individual at the placement agent who will be working with them has all the capabilities necessary to maximise the impact on the fund raising process that the retention of a placement agent was envisaged to have. The third most important factor cited is a confirmation that GPs like to have corroboration when it comes to their evaluation of an agent: word of mouth comment from other GPs and LPs matters. That the fee structure proposed by the agent comes in as the fourth most important item may surprise some as GPs can seem to want to know the price of everything whilst seeing the value of nothing. And a major concern voiced by some GPs – that the agent must not spread itself too thinly by representing too many partnerships at once – actually comes in as the least important issue of the five.
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