Last month I spent several days trawling the offices of placement agents in London to discover the truth about this highly secretive and competitive section of the industry. Among GPs there is a fair amount of ambivalence about these professional service providers. A common criticism is that they're expensive and any fund sponsor worth its salt should surely be able to raise money itself. Right?
First-time funds aside, that argument may have held some sway in the good years. Large funds could rely on being able to pick up the phone to their roster of LPs and get a re-up for the next vehicle.
Managers constantly in fundraising mode with multiple products and in-house professionals, would argue they could represent their firm better than any third-party fundraiser ever could.
While some independent placement agents may have issues, they pale in comparison to placement agents within investment banks
Yet times have changed. As Credit Suisse's Real Estate Private Fund Group said, the skill is in finding new pockets of equity today and in knowing which LPs are going to be back to investing equity in the near future.
It is not an easy job for anyone to raise capital anymore, so it's about time placement agents were not vilified quite as much. Yes, their fees can seem outlandish: 2 percent for a €1 billion fund means agents have regularly been able to bill GPs €20 million for their efforts in recent years.
But how many €1 billion funds are there at the moment? And who would you approach to commit capital to such funds?
PERE is not about to become an evangelist for the placement agent business. Many firms simply don't deliver. There are many GPs who have become so dissatisfied with their thirdparty fundraisers that they chose to seek an alternative firms.
However, there is certainly a need for the private equity real estate industry to value experts who have deep relationships with all kinds of organisations that might keep this industry on track in testing times.
Meeting with several London-based placement agents, I was told some agents have been able to hold their fees steady, and even nudge fees up slightly from 2 percent to 2.5 percent. One firm that has been raising its fees argues that because it is much more difficult to access capital and that the process is taking much longer, it is justified in becoming more expensive.
Make no mistake: the placement agent business is a tough one to be in right now.
The professionals involved are at the sharp end when it comes to finding out that there is little appetite among LPs for blind pool opportunistic vehicles (see our feature on changing LP appetites, p. 45).
And so, in response to LP wishes, they are having to derive fees from different types of business, be that setting up joint ventures, club deals, brokering secondaries transactions or earning advisory fees from would-be first time fund managers who realise this is not the time to ask an LP to back them.
There is also a schism opening up within the industry, which started in New York but has reached London and Europe in general.
While some independent placement agents may have issues, they pale in comparison to placement agents within investment banks. These professionals have in general seen their bonuses capped or been paid with stock that looks more than slightly anemic at the moment.
No wonder some independent agents in London are receiving resumes from their compatriots in investment banks looking for a more rewarding environment.
The credit crisis and subsequent recession is likely to lead to a shake-up of the placement agent industry, just as it will lead to a shake-up of the real estate fund management world.
The good ones will be left standing, which is important for any GP if things remain as difficult as they are today to raise capital from LPs.
These surviving placement agents deserve more credit.