Private Equity Fundraising: How To Work With Placement Agents

Introduction

The moderator introduces the topic of the webinar and sets out some goals for the conversation.

Goals for the Conversation

• Provide ways for GPs to test their static claims, including performance claims and access to LP community.

• Discuss ways that a GP can know they will be made a priority during multiple fund raises.

• Explore how GPs can test placement agents on what LPS want in light of current market conditions.

• Understand how price negotiations look today and best practices for monitoring compliance or using time-saving technologies.

Background Information

The moderator provides background information on why this roundtable was put together.

Private Equity Fundraising Trends

• Half of all private equity funds used placement agents last year, which is roughly in line with 2014 data.

• Despite predictions that GPS would use less placement agents during fundraisings, this has not been the case.

• Fundraising continues to be a marathon exercise, with funds spending an average of 17 months on the road before closing in 2017.

• About half of investors say that managers now sound too much alike and even more say that they plan to shed old relationships for new ones.

Meet the Roundtable

The moderator introduces the panelists and asks them to provide their backgrounds.

Panelist Introductions

• Mags from Lateral Investment Management is raising a first-time $250 million dollar fund with a private debt strategy after previously working for a real estate sponsor where she raised a $25 million dollar initial seed fund.

• The other four panelists are placement specialists who have worked on a wide range of fundraisers in terms of size, strategy, and geography. They will introduce themselves in alphabetical order.

Introduction

The speakers introduce themselves and their companies, providing information on their experience and the types of funds they focus on.

Speakers

• Patrick Campbell: Founder and President of Pros Advisers, a registered broker-dealer in the US and international dealer in Canada. Focuses on raising private equity and private debt funds for institutional investors.

• Brian Fitzgibbon: CEO of Fitzgibbons Regal & Company, an SEC registered broker-dealer that raises assets for select private companies or investment managers in the alternative asset space through private placements.

• Dana Palicki: Founder of Advisors, a boutique placement firm that focuses on sub 1 billion dollar funds.

• Phil Kok: Founder and CEO of Partner Capital Group LLC, a FINRA registered broker-dealer placement agent and consultant serving institutional investors primarily in North America US and Canada.

Current Assignments

The speakers discuss their current fundraising assignments.

Fundraising Assignments

• Dana Palicki's company is currently working on two exclusive fundraising assignments - one in middle market buyout and one in distress credit - as well as advising on some secondary placements.

• Phil Kok's company has completed asset raises totaling over 1.2 billion dollars. They are currently working on a lift out of a portfolio and team in the global opportunistic finance space coming out of one of the major asset managers in the country. They also represent an alternatives manager in the option space.

Due Diligence on Placement Agents

In this section, Pat and Nick discuss the two components of due diligence on placement agents: what happens before and after signing a contract. They also highlight the importance of exclusivity and keyman.

Pre-Contract Due Diligence

• There are two components to due diligence on placement agents: what happens before and after signing a contract.

• To understand the resources of a placement agent, consider their number of assignments in the market, experience placing products relevant to your plans, and cultural fit.

• Keyman is important to ensure that senior executives at the placement agent are focused on your deal.

• Exclusivity is crucial to avoid competing products in the market with the same placement agent.

Post-Contract Due Diligence

• Regular update calls are necessary for maintaining a steady relationship with clients over an 18-month period.

• The update calls have three components: reporting developments over the prior week, updating each other on business updates, and planning ahead for future offerings.

• Communication is essential for making sure that marketing relationships stay intact over that period.

Selectivity

• Placement agents should only take on a few select assignments at any point in time to ensure that GPs always remain a priority with their firm.

Exclusivity

• Exclusivity means being selective about which assignments are doable and important to organizations from the very start.

Dividing the Space

In this section, the speakers discuss how to divide the space in fundraising so that different segments of the market can be raised from without bumping into one another. They also talk about how to resolve conflicts when there is overlap.

Exclusivity and Overlap

• Exclusivity is typically product-focused.

• Represent a limited number of clients (typically two to four) with very different strategies that don't overlap.

• Conflict resolution: exclude investors from the second fund who are still on the list for the first fund.

• Get clarity and make sure all parties know exactly what the ground rules are.

Specialized Strategies

• It's easier to wall off specialized strategies like healthcare or credit.

• Lower middle market buyout is more difficult because there are sub-strategies within it.

• Defining exclusivity can be tougher for these types of funds.

Gray Areas in LP Portfolio Management

In this section, they discuss gray areas in LP portfolio management and whether it creates problems when presenting to funds.

Gray Areas

• There may be gray areas if an institutional investor's portfolio or portfolio management procedures do not break along sector-specific strategies.

• Overlap will occur on the LP side where one portfolio manager or specialist is responsible for multiple investment strategies.

Testing a Placement Agent's Understanding of LP Community

In this section, they discuss how GPs can test a placement agent's understanding of the LP community.

Testing a Placement Agent

• Examine the people at the placement firm: are they professional, a good fit with your team, and would you hire them internally?

• Focus on the experience of the placement firm itself: how long have they been in business, what strategies have they handled successfully, what makes them unique, and what are their target markets?

• Are they licensed broker-dealer or affiliated with a broker-dealer?

Understanding the Community

The panelists discuss how placement agents examine managers and the due diligence process that is used to determine the expertise of an organization.

Due Diligence Process

• Placement agents use a due diligence process to examine managers.

• Understanding the due diligence process can help determine the expectation and expertise of an organization.

• Careful thought should be given to who is used for references, as getting picked off on lists and references can be detrimental.

• It's important to have great relationships but also be guarded until there is a formal contract in place with the GP.

Finding Investors

The panelists discuss finding investors and what they look for in a placement agent.

Investor Constituency

• Going to market thinking one constituency will be the predominant investor group may not always hold true.

• Having a working knowledge of key issues for potential investors is important to give GPs a heads up on what they're going to have to prepare for on the legal end.

Cultural Fit

The panelists discuss cultural fit between placement agents and fund advisers.

Reasonable Expectations

• Having reasonable expectations in terms of timeframe, difficulty, and chemistry are all part of this fit process.

• Good chemistry is important when getting into bed with each other for a year or more.

• Day-to-day mechanics such as travel can differ between clients, so it's important to come to an understanding upfront.

Introduction to Placement Agents

In this section, the speakers discuss the different types of placement agents and the importance of having a good relationship with them.

Types of Placement Agents

• There are two types of placement agents: those who act as commodities and those who form partnerships.

• A successful partnership can last for decades.

Importance of Cultural Fit

• It is important to assess cultural fit when working with fund managers.

• The team's ability to work well together is crucial during presentations and meetings.

Fundraising Considerations

• It is important to consider how new the fund manager is and how many funds they have raised previously.

• Pushing meetings forward requires a good team that works well together.

• Delegating responsibilities depends on the resources available to the GP, their marketing capabilities, and admin support.

• The messaging should be set by the GP, but it's up to placement agents to communicate it effectively.

• Someone in-house should manage all names and meetings.

Capability Assessment for Fund Staff

This section discusses how capability assessment can help determine what aspects of fundraising should be delegated in-house or outsourced.

Capability Assessment

• Capability assessment involves assessing the current staff's abilities and determining what needs outsourcing.

• Different levels of IR personnel may require different levels of assistance from third-party firms.

Scope Assessment

• The scope of an assignment determines what aspects need outsourcing.

• Some assignments may require more extensive third-party assistance than others.

Conclusion

• The decision to outsource fundraising responsibilities depends on the GP's resources and capabilities.

Roadshow Calendar and Scope of Assignment

In this section, the speakers discuss their strategy for mapping out the Roadshow calendar and how they view scheduling and working within the GPS availability. They also talk about the varying scope of their assignments.

Mapping Out Roadshow Calendar

• The team has a particular strategy for mapping out the Roadshow calendar.

• They view scheduling and working within the GPS availability as something they like to take charge of.

Varying Scope of Assignments

• The team's assignments vary quite a bit.

• For full-on retainer paying clients, they redo all materials from front page to back page, taking responsibility for the entire fundraise.

• For smaller list of names assignments, they deal with 10-50 names and put in their two cents if needed but it's not an intensive exercise.

• It depends on what the GPS need to fill is and making sure that it's a proper fit with the agent.

Communication Touchpoints with Placement Agents

In this section, the speakers discuss who communicates with placement agents at GP level. They also talk about delegating communication touchpoints to junior members.

Communicating with Placement Agents at GP Level

• There is variance in who communicates with placement agents at GP level - sometimes a junior analyst, other times more senior.

• For one assignment where there is no dedicated person in-house, senior people rely on them heavily for all aspects of fundraising.

• On some assignments, they deal directly with the investment team who coordinates them to come out to meetings.

Delegating Communication Touchpoints

• The speakers do not make it a habit of delegating anything communication-wise to a junior member.

• Junior members are utilized more as a resource for updating reports and making sure all i's and t's are crossed when it comes to Roadshow calendar planning and scheduling.

Finding a Good Fit

In this section, the speakers discuss finding a good fit with placement agents. They also talk about examples of when it's not been a good fit.

Finding a Good Fit

• It is critical to find a good fit between placement agents and GP.

• Anything that they can do to make the lives of GPs easier is important in having a successful raise.

Examples of When It's Not Been A Good Fit

• One recent experience turned out not to be a great fit where they had been introduced by an industry veteran but it simply didn't turn out well.

Unsuccessful Fundraising Experience

In this section, the speaker talks about a fundraising experience that did not go well due to unrealistic expectations and lack of commitment from the GP.

Issues with the GP

• The GP had unrealistic expectations and was not willing to spend money on necessary work.

• The GP was obstinate about making changes to the presentation and did not want to get involved in sales calls or meetings.

• The traders were expected to do all the work, which led to a bad experience.

Lessons Learned

• Managing expectations is critical for successful fundraising.

• It is easier to work with funds when there are people with prior fundraising experience involved.

• Unrealistic expectations can lead to difficulties in raising funds.

• Setting expectations and having buy-in from GPs is crucial for successful fundraising.

Factors to Consider in Fundraising

In this section, the speaker discusses three factors that are important to consider when fundraising: sponsor, product, and market conditions.

Sponsor

• The reputation of the sponsor in the institutional market is an important factor to consider.

• A well-known name can make fundraising easier.

Product

• The right product for a particular market is crucial.

• The product should be suitable for the current market cycle.

Market Conditions

• It's important to assess the actual market conditions when marketing a product.

• Hot or cold markets can affect fundraising success.

Weight Given to Vintage Year and Sector in Placement Agent Review

In this section, the speaker talks about how much weight they give to vintage year and sector when reviewing placement agents.

Vintage Year

• The fundraising environment changes quickly, so it's important to assess where we are at in the market before considering vintage year.

Sector

• No specific bullet points provided.

Importance of Being Responsive as Fundraisers

In this section, the speaker emphasizes the importance of being responsive as fundraisers and understanding what investors are seeking at any given time.

Responsiveness

• Being responsive is crucial as fundraisers.

Understanding Investor Needs

• No specific bullet points provided.

Evaluating Fundraising Challenges

In this section, the speakers discuss how to evaluate fundraising challenges and address them. They also talk about a manager's question regarding highlighting challenges in each fundraise.

Addressing Fundraising Challenges

• Most funds face challenges during fundraising, such as team member transitions or strategy changes.

• Evaluating these issues and successfully marketing through them is crucial for successful fundraising.

• A manager asked about highlighting challenges in each fundraise, which was a good exercise for everyone.

Negotiating Price and Cost Models

In this section, the speakers discuss negotiating price and cost models in fundraising.

Retainer Model Evolution

• The retainer model has evolved since 2008 due to increased competition and selectivity among LPs.

• Monthly or upfront retainers are now standard for full fundraising assignments.

• Other fees can be negotiated, including administrative fees ranging from 15 to 50 basis points.

Continuation Rights Discussions

• Continuation rights discussions for the next fund or specific investors can also be part of negotiations.

• Placement agents may receive a 50% fee for bringing back certain investors to future funds.

Balancing GP and Investor Needs

• It can be challenging to balance GP and investor needs when negotiating price and cost models.

• Incentivizing placement agents to work on relationships with new investors is important.

Making Money in the GE Business

The speakers discuss the costs associated with the GE business and how it may take a few funds to make money.

Costs Associated with the GE Business

• It is possible to make money in the GE business, but it may take a couple of funds to get there.

• The speakers are aware of the costs associated with their business and what they need to do for success.

Rules and Regulations for Signing Papers

The speakers discuss FINRA registrations, broker dealers, and knowing where placement is targeting.

Types of Rules or Regulations Needed Before Signing Papers

• FINRA registrations are necessary when dealing with broker dealers.

• Knowing where placement is targeting is important when signing papers.

Conclusion

The webinar has ended and attendees will receive a recording.

End of Webinar

• A recording of the webinar will be sent out to all attendees.

• Thanks given to roundtable members for an informative conversation.