The expected dismantling of Merrill Lynch’s fund placement business by Bank of America represents the end of an era. Tracing its roots back to the late eighties, the operation is widely given credit for spawning the cottage industry of assisting private equity firms with capital raises. Alumni from Merrill went on to establish similar operations at other investment banks and to set up some of the independent operations that are gradually taking the lead in the industry.
As Mounir Guen, the CEO and founder of MVision Private Equity Advisers, succinctly puts it: “Merrill is the mother of everyone.”
The feelings the event itself engenders can best be described as a predictable sort of shock. Guen, who spent 13 years at Merrill Lynch before striking out on his own in 2001, said the scenario is similar to what played out at JP Morgan following its merger with Chase Manhattan Bank in 2000. The combined entity looked to position itself somewhere between Wall Street and Main Street and decided the placement agent business was a bit too esoteric for its tastes. Combine the culture clash between Merrill and B of A with abysmal business conditions and it’s easy to see how the decision was made.
“B of A has no heritage in the [fund placement] business,” Guen said. “Right now, the numbers are terrible for everyone. Fees are dropping. There’s no new product. They [B of A] look at that and say, What are we keeping this going for?”
Merrill may have also hurt itself by getting too far away from working with smaller GPs, according to Guen.
Another market change is that some bigger buyout shops have taken their fund placement operations in house, even going so far as to get in the business for themselves.
While there’s been no official statement from B of A about pulling the plug, various media reports in late June said the writing is on the wall for the unit, which employs more than 30 professionals and is led by Loren Boston, who previously headed the fund placement agent business at Citigroup, according to peHUB.com, the sister Web site of Buyouts.
The Merrill fund placement team is currently helping to raise between 15 and 20 funds, the peHUB.com report said, and it’s expected to continue to provide full services through at least the beginning of the fourth quarter and probably through the end of the year. There won’t be any new clients from here on out, however, and the plan is to provide transition services to existing ones if needed, the report said.
Many factors likely contributed the anticipated unit’s demise. Chief among them is the horrendous fundraising environment. Guen painted a colorful picture of what placement agents are up against right now.
“Here it is: Investors normally set their allocations in November but because of the turmoil in the financial markets, fair value accounting etc., they are only just getting them now. What’s more, they’re getting less, say at least 20 percent less,” he explained. “The first thing they’re [LPs] doing is using some of their pledges to fix the architecture of their portfolios – you can still get into quality GP for a discount through a secondary – then they turn to re-ups, and really, how much is going to be left after that? At the same time, GPs are trying to put off coming to market for as long as possible.”
Also playing a part in the business’s closure was likely the fact that B of A didn’t have a fund placement business of its own, creating a branding challenge that may have had the unit’s staff feeling orphaned and jumpy. Whether the group will look to spinout on its own or will simply break apart isn’t known.
The original fund placement operation at Merrill was led by Jerome Greene, who spent ten years with the firm. He left in 1990 to work with M. William Benedetto and Arthur J. Gartland Jr. at their namesake firm, which then became Benedetto, Gartland & Greene. Greene has been on his own since 1997 when he founded JP Greene & Associates, which has a total of six professionals, including Greene himself, and offices in Indianapolis, New York and Toronto.
Other Merrill alumni ended up at Credit Suisse’s operation through that firm’s purchase of Donaldson, Lufkin & Jenrette in May 2000. In a move that established a well-known rivalry while the industry was still in its early stages, the DLJ operation was set up by Phil Pool in 1994 upon his departure from Merrill. The unit at Lazard Freres & Co., which began operations in 2003, also traces its roots to Merrill alumni.
The loss of Merrill from the competitive landscape continues the move away from units couched within larger investment banks toward independent operations offering specialized expertise, such as access to limited partners in a particular region or of a certain size or type. Among the prominent independents are Atlantic-Pacific Capital, which was founded in 1995 and lists 20 principals on its Web site; and Probitas Partners, which has offices in Hong Kong, London, New York and San Francisco and shows 23 senior professionals on its site. Many of the players that have been instrumental in the growth of these independents and others have either direct ties to Merrill or to the operations subsequently spawned by Merrill alumni.
MVision itself has more than 40 professionals, and Guen told Buyouts the firm is in expansion mode, adding staff in both Asia and the United States. MVision was involved in the raising of roughly $36 billion in capital in 2008, participating in 14 full closes involving more than 1,000 investors, he said.
Guen believes the future is bright for the independent, boutique firms, even as an industry institution like Merrill’s operation winds down. He expects that, in the long run, even the recent pay-to-play scandal involving the
He also thinks the bigger corporate entities could very well come back one day, as they tend to be opportunistic.
“Institutions can swing very quickly,” he opined. “This is nothing a bull market won’t cure.”