Private Equity Shops Ramp Up Placement Agent HiresBy Josh Azar September 7, 2016
Placement agent use is on the rise among private equity, real assets, and private debt funds, topping the most recent post-2008 peak, according to a recent Preqin survey. Unlike the past cycle, however, the driver may not be a struggle to win over wary investors but rather more fund managers crowding into the fray.
So far this year through July, 54% of all private capital funds that have closed used a placement agent – up from 51% last year, 47% the year before that, and 46% in 2013. Of funds still in the market, 47% are using a placement agent, but Preqin says this figure is likely to go up, "as some fund managers only appoint a placement agent part-way through fundraising."
The big push appears to be an effort to stand out in a busy marketplace, says Christopher Elvin, head of private equity products at Preqin. Nearly 2,800 funds were in the market as of July, up consistently and dramatically from the 1,300 at the start of 2008, Preqin data shows.
"Managers are reporting that the fundraising process is becoming more competitive, and there are record numbers of new private capital funds continuing to come to market," he says. "In these conditions, it is unsurprising that more fund managers may make use of placement agents to increase their chances of achieving a successful fundraise."
Placement agent use has spiked before, most recently rising from 45% in 2008 to 52% in 2011, but it quickly fell the year after to 44%. "It is worth noting that the period 2009 to 2011 was marked by the relatively low number of funds which reached a final close, and placement agent use rose correspondingly," Elvin says. "In 2012, the number of funds which reached a final close rose, and the proportion which used a placement agent fell."
It’s logical that in tough times – such as the years following the 2008 financial crisis – funds will seek extra help sourcing capital. But conditions now are the not the same as the years immediately after the crisis. Today, there seems to be no shortage of investor confidence in the private equity space.
Net inflows to private equity from North American institutional investors rose to $54.5 billion in 2015 from $38.3 billion in 2014, according to MandateWire’s database. And this year is on pace to exceed that figure. Net inflows rose to $22.6 billion in the second quarter this year from $14.5 billion in the previous period, a nearly 56% increase.
Managers have, not surprisingly, flocked to the market. But they may be outpacing the demand, even with more investors interested in the space, says Peter Martenson, partner at Eaton Partners, a placement agent firm.
"There’s been a proliferation of fund managers out there, spinning off of platforms, creating new platforms, and there hasn’t been that magnitude of proliferation of limited partner capital out there," he says.
Indeed, despite the strong limited partner (LP) interest, it’s as challenging as ever to win new mandates, Martenson says.
"LPs and consultants have a lot more things that take their time and distract them, and we’ve found that what that means is a lot more touch points are required to move an investor or consultant through their process," he says. "These days we’ve seen that it takes between 25 to 45 calls, emails, or meetings for a close."
The challenge is starkest for first-time managers, which often can’t afford – or are unwilling to pay for – a top-tier placement agent that has built strong market relationships with consultants and investors, Martenson says.
And even if first-time managers can afford a prime placement agent, there’s no guarantee the agent will be interested in representing them, says Gail Guerin of Guerin Group, a strategic consultant specializing in fundraising.
"It’s hard to attract the really good [placement agents] when you’re the new kid on the block, because they have lots of choices," she says. "I think what you’re seeing now is the Ivy League of placement agents."
High end marketing firms often will not take on funds they don’t think they can successfully raise capital for, Guerin adds. "They want to keep their batting average positive as well," she says.
On balance, a reputable placement agent can offer a real value to managers, Guerin says. "Investors get to know the placement agents," she says. "They understand there are certain agents that will only bring them quality."
And that may mean placement agent use may continue rising among both new and established private equity managers, unless the fund competition thins out, Guerin says.
"If you don’t have a quality offering, the best placement agent in the world isn’t going to be able to help you," she says. "But if you’ve got a chance at getting an investor’s attention, the placement agent is going to be the one who’s able to make you laser-focused on where those opportunities are."