The huge level of fund raising for private equity in the last year or two, particularly by so-called mega funds, may have passed its peak. With so much new money sloshing around the system, some believe fund raising will begin to slow down.
At first glance this would be bad news for placement agents, who make their living from putting investors in touch with new funds and vice versa. On the other hand, the fact that the recent fund raising figures have been bumped up, in large part, thanks to the mega funds could be good news for placement agents. Charles Cecil, managing director at agent Helix Associates, says: “It’s possible there will be a slowdown in fund raising but you must remember that the last two years have seen huge activity and so even if there were a 10% to 20% fall it will still be high by historical standards.”
Patrick Petit, founder of Paris-based Global Private Equity, says: “We’ve seen two very important years for fund raising but a very significant part of that has been the mega funds.” He adds that not everyone is interested in the mega funds, with institutional and family investors still interested in identifying the best funds in other areas, whether that be niche products, sector funds, the mid-market or even venture: “All these kinds of funds will be going back to market in 2007 and 2008.”
Figures on the use of placement agents vary. According to research last year by SCM Strategic Capital Management, the percentage of funds using an agent was 51% compared to 58% in 2004. Others put the figure far lower, at around 20% to 25% of funds. Uncertainty about figures may be partly due to definitions, says one adviser: “Some funds are looking for someone who will give them help not just on raising funds but also other advice, and so they’ll call them advisers rather than placement agents, and that can distort the numbers.”
Coller Capital’s Global Private Equity Barometer in summer 2006 found that three-quarters of the LPs surveyed believed that placement agents added value for GPs in terms of polishing GPs’ message and helping them access the right people.
“That’s quite a positive view from the LPs, given that you often get something negative said when you raise the subject of placement agents,” says Coller Capital partner Daniel Dupont.
He believes that the role of placement agents has evolved in recent years, from placing funds to developing and maintaining relationships, predominantly with LPs. “While GPs will only get in touch with the placement agents when they’re planning a fund raising, the agents will be meeting the LPs more regularly to pass on market intelligence and maintain the relationship.”
He argues that placement agents can add a lot of value for GPs when they know the client well and what his needs are. “I used to work at a GP and some placement agents were very good. They’d know exactly what you wanted and come up with products that were just right.
“But there are large variations in quality, with some placement agents having genuine market intelligence that is useful, to others who just cold call GPs and LPs to try and drum up business.”
When looking at the potential role of placement agents it is important to recognise that the mega funds will not use independent agents and may not even use the placement agents based at the large investment banks.
“Because we’re an independent we’re not going to be working on the latest KKR, Blackstone or Cinven fund because generally they’ll do that internally or use one of the investment banks,” says Patrick Petit of Global Private Equity. Another adviser argues that the market has got tough for the investment banks’ placement agents, simply because the big private equity funds have built up their own investor relations teams, often headed by former placement agents.
For the independent, or boutique, placement agents there is still the large expanse of the mid-market to exploit. “While it is the mega funds who distort the overall numbers, the real picture is that there is still a large number of GPs in the market place on a global basis and a large number of investors looking for product,” says Mounir “Moose” Guen, founder of advisers MVision. He adds: “When you put those two factors together you can see that there will still be a strong flow of business for placement agents.”
He argues that the strength of an organisation like MVision is that it straddles the gap between the small boutiques and the investment banks: “The banks go after the mega funds and the smaller funds are done by boutiques with a low headcount and looking to do two or three funds a year to sustain their lifestyle. There’s nothing in between but a lot of very good product in that space.”
Guen argues that perhaps there is, or will be, less work around for the traditional placement agent who just sees their role as raising funds: “The business has evolved and a ‘smile and dial’” approach to the work is no longer viable. Instead, many GPs are looking for a full, longer-term service and we provide a classic, solid advisory service.”
He adds: “We deal with a select number of clients, look at their business and how they’re projecting themselves and how they’re investing.”
Josyane Gold, a partner at law firm SJ Berwin, agrees that the role of placement agent has developed and that that will continue. “Different GPs use placement agents for a number of different functions,” she says. These include in an advisory and guidance role, including writing the private placement memorandum, or for introductions to investors and distribution of product. A third role that has developed in recent times is helping a fund manage over-subscription (see sidebar).
Armando D’Amico, managing partner at advisers Acanthus, says that fund raising, regardless of the cycle, has changed and become much more sophisticated. “Funds need to address a very wide audience, as there are around 30 key opinion formers in Europe, so you need to address them as well as all the other categories of investor.”
Fund raising today requires more advisory and analytical skills than in the past, he says, when the process centred on a number of formalised steps, notably putting out the memorandum of information, meeting potential investors and due diligence.
As well as an evolution in the role of many placement agents, there has also been some pressure on fees, according to Antoine Drean, founder of placement agent Triago. “We’ve been around for 14 years and so we’ve seen a lot of changes in the market over that time.” He says that in the last couple of years, because there has been so much easy money around, many funds have regarded placement agents as less necessary.
“Some of the larger placement agents, both independent and those at investment banks, have been struggling because their usual clients have been getting a lot of returning investors and so think ‘Why do we need a placement agent when we can easily raise the funds ourselves?’”
Some placement agents, he says, were charging 2% of the total funds being raised a couple of years ago but, in some cases, have had to squeeze that to 0.25%. Others argue that fees vary significantly, depending a lot on the quality of service being provided: “You can charge premium fee for a premium service,” says one.
Josyane Gold of SJ Berwin says that fee structures have become more flexible. She says: “Five years ago placement agents were usually pretty firm that they would only take the whole job, not a sub-set. They didn’t want a lesser role.” But as more placement agents entered the market and competition heated up they became more flexibile, both in terms of their role and the fee structure, she says, adding: “Before it might have been 2% of the total fund value, but in some cases we now see stepped fees or other variations and some placement agents have been mandated to just work on particular geographical regions.”
Charles Cecil of Helix says that if there is a reduction in mandates there may be a squeeze on fees for the most desirable funds, as long as the GP feels that the services offered by placement agents are broadly comparable.
In any case, Triago has attempted to differentiate itself in the past three years by “reinventing its business” and identifying new investment areas and teams that it can advise and fund raise for. Drean says: “At the end of the day, it’s not about working with Cinven or Blackstone but about finding new areas, such as value activism, where we’re doing two to three funds a year. It’s a small area but it could grow. “
He adds that Triago has become active in distressed/turnaround funds: “This isn’t a new area but it’s one that we expect to become more attractive in the next year or two.” Currently, it is doing fund raising for one or two distressed/turnaround funds a year, and in some cases that has been very specialist, such as a fund focusing on distressed companies in the mining industry. Another area Triago has been looking at is specialist buyout funds focusing on particular industries.
Drean says that it is also the kind of investors that a placement agent can put funds in touch with that can help it differentiate itself. On the LP side Triago has relationships with a number of families around the world, close to 100 billionaires. “It’s not always easy to build relationships with these families but we’ve been around a long time.”
Some GPs, who need no help from placement agents in finding institutional investors for their fund, may also be seeking some family investors and find that harder to achieve by themselves. “That’s an area we can add value,” says Drean.
He argues that, for many LPs, there is less interest in the plain vanilla private equity fund. A few years ago many of these family offices were keen on standard buyout funds but today, with everyone else piling into buyout funds and less optimistic expectations for their returns, they are looking for new investment areas and products.
“These investors want to make 25% a year and so you need to be constantly identifying niche products that can offer that kind of return, such as some of the investment areas we’ve been developing,” says Drean.
Despite the fact that there may be less fund raising in the next year or two, some placement agents are heartened by the fact that it is a fluid market in which new products and investors are continuing to arrive. “Private equity is a mature market now and there’s a continuing flow of new managers, as a result of spin-outs or bright mid-level professionals breaking free from existing funds and setting up their own funds,” says Acanthus’ Armando D’Amico.
The business has become more flexible, he says. One scenario is where, say, a spin-out fund with no follow-on investors takes on a placement agent to do the whole fund raising. Another scenario is where a house that has already raised three or four funds and so has a loyal group of investors uses a placement agent for process management and perhaps to bring in a few investors from new geographical areas. “In that case the house may agree to pay a different fee for different investors, new versus re-ups, but will definitely value the assistance of the placement agent in the preparation of the documentation and in the overall process management.”
Patrick Petit of Global Private Equity says that for him the business is not about quantity but quality and that the good mid-market funds and other niche funds will still be attractive to investors. “I think we’ll see a flight to quality,” he says. Global Private Equity, he says, looks at about 200 funds a year but works only with five, and that strategy is unlikely to change in the next couple of years.
Petit argues that placement agents need to be careful about working with too many funds. “Some funds seem to think of themselves as being in a league table and try to get as many fund mandates as they can, but I think there are potential conflicts of interest that can arise from that approach.
“For example, we have one venture fund but we would never take on another at the same time, even if there were not a direct overlap of investment strategies. We only take five mandates because we don’t want the conflict of interest difficulties.”
For Moose Guen of MVision there will continue to be an important role for the placement agent or outside adviser: “The big difference between the placement agent and non-placement agent is that when a group is raising funds for itself it basically knows about one product – its own. Whereas we know about all kinds of products and have a deep understanding of investors and what they want in different cycles and situations. Because we’ve worked with so many GPs we can show the client how they are doing compared with some of these other GPs – not just in fund raising but also in areas like reporting, protocol, meetings and so on.”
He says that the big question determining how successful placement agents are in the future will be how hungry they are: “There are a number of boutique placement agents in comfortable mode. They have enough business to sustain their comfortable lifestyles but where’s the hunger, the drive? Not too many have that.”
“In the future there will be plenty of opportunities in the market, whether that be first-time-funds, mid-market or popular funds but who will have the hunger and the right model to take advantage of those opportunities?”
If the spotlight moves away slightly from the mega funds in the coming period, it may be good news for smaller funds, says Armando D’Amico. “In the last two years smaller funds have had a tough time because all the attention has been on the mega fund raising.
“That’s meant that often investors will put the smaller fund on the backburner while they focus their efforts on getting an allocation in a mega fund. So it could be good news for smaller funds if there is a slowdown in fund raising by the large houses.”
Working with oversubscribed funds
Nordic technology fund Northzone Ventures had its fastest and most successful fund raising ever this year, when it closed its fifth fund at €175m. Global Private Equity was placement agent on the fund raising, whose initial target was €150m. There was so much interest in the fund that at one stage investment commitments stood at €225m, says Global Private Equity founder Patrick Petit.
Scaling back the investment from €225m to €175m became part of the placement agent’s role, and it is a role that has become increasingly common in the recent period of very high demand for private equity and, in some cases, venture funds.
Josyane Gold of lawyers SJ Berwin says that this role of helping funds manage oversubscription is a role that has developed in the past 18 months, although she adds that it is a role that is likely to diminish as the market slows down. “It’s not so much about introducing new clients but rather managing the oversubscription, managing investors’ expectations and keeping them onside for future fund raising.”
The recent period is not the first time that funds have been oversubscribed, she says, but the first time placement agents have been used to help manage the process.
Charles Cecil of Helix Associates says that in oversubscription cases, one role of the placement agent is to help the GP evaluate which investors should be favoured. He says: “That kind of decision should not be based on any capricious basis, but rather on a range of factors, such as the length of the relationship with that investor or, if it’s a new relationship how long and fruitful it is likely to be.” Other factors used in making the decision will be the quality of the dialogue between GP and LP so far and whether the LP has had any problems with terms and conditions. Also, the placement agent will advise on achieving an appropriate balance of LPs. This may mean, for example, a limited number of fund-of-funds.
There are also questions such as whether the GP will reduce certain investors’ allocations or simply not make an allocation at all, says Cecil. “The GP may say it wants such-and-such an investor to be included or excluded, but the placement agent will try and advise on the implications of those decisions, not just for this particular fund, but also for future fund raising.”
Patrick Petit says that generally his attitude is one of first come, first served. He says that a “game” which investors should stop playing is holding out to the last minute before committing to a fund. “Investors are sometimes wrong just to wait and see what the others are doing. The sharpest ones are usually the early investors and you can argue that first close investors should be treated better than last close. There’s a debate about that.