A lobbying group for the placement agent industry has formed to “educate the market” about the role of legitimate fund placement businesses and how they differ from illegitimate finders.
The group has no official name and is a loose coalition of about 25 to 35 firms, some that contribute small amounts to a budget, and others that simply want to remain informed about the industry. The placement agents involved work across various asset classes, including private equity, real estate and infrastructure to more obscure pools of capital like an agricultural fund “that no pension plan would ever get exposure to if not for placement agents”, a spokesman said.
Placement agent CP Eaton has led the formation of the group, whose members’ names are not being disclosed publicly, the spokesman said.
The group was formed in the wake of bad publicity from the recent pay-to-play scandal involving the $109 billion New York State Common Retirement Fund. Several states, including New York, New Mexico and Illinois, have in recent months barred placement agents from interacting with public pensions on behalf of private investment clients. Meanwhile, certain pensions, like the California Public Employees' Retirement System, have strengthened their disclosure requirements for third-party marketers that work with private investment firms for commitments.
The latest threat to placement agents comes from the US Securities and Exchange Commission, which has proposed a nationwide ban on placement agents soliciting public pensions on behalf of private investment clients. The SEC proposals was laid out in testimony by SEC commissioners, including chairwoman Mary Schapiro, but the actual plan itself has not yet been released by the SEC.
The SEC proposals also would bar private investment firms and their executives who have contributed to elected officials in a position to influence pension investment decisions from working with or soliciting money from the pensions.
A nationwide ban on placement agents working with public pensions could destroy the industry while not actually addressing the problem, which has more to do with politically connected “finders”, according to Charlie Eaton, founder of CP Eaton.
“We’re trying to encourage the politicians involved in these decisions to understand what a legitimate placement firm does, what our role is, our reason for existence, why we get paid, why investment firms hire placement agents instead of staffing up,” Eaton said. “The insiders and fixers can’t do what we do, they don’t have the expertise, the broad reach, they don’t know the investment business as well as the broad-based firms.”
Pensioners will be the ones to suffer if placement agents are removed from the investment process with public pensions, Eaton said.
“They won’t have access to small, middle-sized emerging investment managers and their strategies, those firms cannot market themselves on a very broad basis, they don’t have the broad reach,” Eaton said. “If there are a couple pensions that won’t talk to agents, then maybe the GP can do it themselves, but they probably won’t, they’ll be too busy trying to do their jobs and work with the prospects their placement agents have introduced them to.”
Eliminating the political factor from the interaction between private investment firms and public pensions is a good thing and the lobbying group fully supports that aspect of the SEC’s proposal, Eaton said.
“We don’t deal with politicians; we deal with investment staff of investment funds and other institutions,” Eaton said. “Those who deal with politicians and use their favors and pay-to-play, should be removed from our industry.”
The lobbying group is working to gain the support of other industry players to advocate for the placement agent industry as a necessary and legitimate part of the investment world.
“We need help from GPs, LPs, consultants and lawyers who work in the alternatives space, we need them to take a position, and contact the SEC during the comment period and give their own thoughts on whether there’s any role for certain types of placement agents that adhere to certain rules and standards in the business,” he said.
European placement agents have gotten into the act as well. The European Private Equity and Venture Capital Association (EVCA) established a code of conduct that attempts to eliminate the possiblity of pay-to-play and requires agents to disclose political or quasi-political donations made by placement firms.
Under the EVCA code, placement agents should not make any payments or other offers to bring a third party to enter contractual negotiations with a client; keep records of the performance of its duties for a minimum of five years; disclose any and all payments agreed to with a client, and any other payments made or received on behalf of a client. Among other things, any sub-placement agent engaged by a firm must be disclosed to clients and a firm's role, and the role of any sub-placement agent, should be disclosed in marketing materials issued by a client.