This post is part of our 2023 Market Trends Report. Download the full report for more insights into how GPs are navigating the new GP-LP dynamics.
Over 35% of respondents in our State of Fundraising 2023 survey reported that they’re increasing their reliance on placement agents, indicating that GPs are looking for an advantage in what they report to be the most challenging fundraising environment in several years.
“We're seeing a definite uptick in GPs wanting to use a placement agent,” says Ryan Still, Managing Director at Eaton Partners, a leading global fund placement agent. “The fundraising environment is as hard as it's been since 2008 and investors have a lot of leverage. They’re over-allocated to private equity or alternatives, so they have to just stop making new investments. Another major factor is the slowdown on deal activity: fewer exits means fewer distributions for LPs to have capital to reinvest in their current GPs, let alone new GPs.”
With a 26% increase in the number of private funds in 2021-2022, according to the SEC, the explosion in asset managers in the market has compounded the competition. “15 years ago an LP only had a handful of quality GPs to pick from,” says Ryan. “Now there are dozens of really good options out there for investors. We’ve seen a huge uptick in requests from strong fund managers who normally wouldn’t hire a placement agent.”
The perception that GPs who enlist the services of placement agents are lacking the ability to independently secure investments is quickly changing as fundraising becomes more challenging. The decision to utilize placement agents often stems from a desire to access a broader network, tap into specialized expertise, and efficiently navigate the complex landscape of fundraising, rather than a reflection of a GP's competence.
While placement agents are commonly thought of as introduction services, it’s only one part of their scope of work. They are key partners who assist GPs through each stage of fundraising, from marketing packages and brand refinement, document preparation, relationship management, finding service providers, to aiding LPs to the final close of the fund. They also continuously help GPs refine their investor pitch and presentation to ensure they are delivering a compelling case for investment.
“It's consultative upfront,” says Ryan. “They’re bringing us their strategies and asking us to poke holes in it, tell them where they need to improve, what they need to do before they’re ready to talk to LPs. So we spend six months working with the GP on things like hiring a CFO, or hiring a second partner because there's a key man risk and LPs won't like that. GPs need to clearly communicate their differentiators and make sure their pitch stands out, then get their deal pipeline going.”
Established and first-time managers who used placement agents had more success in exceeding their fundraising targets compared to those going it alone, according to a recent Preqin service provider report. 68% of established managers surpassed targets for funds closed in the 18 months through June 2023 when using a placement agent, compared with 44% for those who did not.
With 49% of respondents to our State of Fundraising survey reporting that they’re exploring new geographies for new sources of capital, with Asia being a particular target according to Pitchbook, working with a placement agent ensures that those GPs have access to specialists with deep knowledge about different fundraising and marketing laws, restrictions, and requirements unique to each geography, as well as local languages and etiquette. The complexity of navigating these laws varies depending on a GP’s targeted regions.
In some geographies, an offshore fund is not required to register with the country’s local financial authority given certain conditions, such as in Hong Kong, where a foreign fund does not have to register with the Securities and Futures Commission (SFC) when marketing solely to what the SFC deems “professional investors.” In other areas, a placement agent must possess a license to market funds to qualified investors in that specific region, such as the Type II Financial Instruments Business license that allows offshore funds to market to Japanese institutional investors. In Europe, foreign funds must work within the confines in the Alternative Investment Fund Managers Directive, as well as follow the private placement rules of each country, as each country’s registration, filing, and reporting operates differently.
Placement agents often have an expansive network of fund lawyers, administrators, accountants, and auditors who can advise GPs further, as well as other placement agents in specific target regions.
According to Preqin, Credit Suisse Group’s placement agent business is the most prominent within private capital fundraising, servicing 430 known private capital funds. This is an increase from 310 funds at the end of 2020.
For GPs without a strong internal IR team with the capacity to handle each stage of the capital-raising process, fundraising is often a taxing, time-consuming effort. Through direct conversations with LPs, placement agents have invaluable knowledge on which investors are not interested in a particular geography, strategy, or fund size so they can provide a targeted list to the GP, saving time by avoiding unproductive conversations.
“We have to know what the LPs are looking for,” says Ryan. “An LP could say to us that they’re so full on healthcare, they need lower middle market industrial. When we've heard that enough we’ll go find a good manager in the industrial space. Or LPs might want uncorrelated strategies, so we've gone out and found music royalties or litigation finance or aircraft leasing. So sometimes, even if the GP is great they’re not what LPs are looking for so we can’t take them on.”
Vital factors when you’re considering possible placement agents:
- Look for a track record of success. How many successes have they had with firms like yours? Can they tell you why some raises were and weren’t successful?
- Look for a vast network of solid relationships. Who do they talk to? This is critical because some firms say they know investors but then bring in junior associates to essentially make cold calls. That can hurt their credibility—and yours. Find out who contacts the investors.
- Ask them to share their progress with you. Do you have strategy and progress calls? Do you know who they are contacting and talking to on your behalf? You need to be assured they’re always moving forward in the process and looking for opportunities.
- Skin in the game. Some placement agents don’t charge fees unless they raise capital. While this may sound attractive to some GPs, reconsider. Too often, GPs will hire three or four agents when they agree to a fee based on results. Essentially, the placement agent is working for free, which often results in no real commitment. Unless there is a commitment on both sides, the relationship will likely fail—a waste of time for everyone.
Placement agents have preferences in their clientele, too: certain placement agents choose not to work with fund managers that have solicited capital prior to seeking an agent’s services, given that it would be difficult for the placement agent to generate new interest in a fund offering if the GP has already unsuccessfully canvassed the market, or if they don’t have a track record they think will appeal to LPs.
“In a given week, we might speak with 30 new GPs,” says Ryan. “We don't even go to a second call with 28 of them. We know from experience that LPs are going to want to see certain things in a track record, so we advise them to do a couple of deals as an independent sponsor. But if it's a team that has continuity and a track record that an LP can underwrite, that's who we'll take on.”
Ultimately, a good placement agent can be an effective extension of your team in a challenging fundraising market and should be treated as such. While they have the networks to facilitate the introductions, the onus is on IR to take over those relationships and build on the work done by your placement agent. While they may equate to expensive money, because of the work done upfront it’s likely to be sticky and worth the initial investment.
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