There's no doubt about it, private equity real estate investment is on a roll. A recent study by Kingsley Associates suggests that $60 billion will be raised in the real estate sector this year. And according to statistics compiled by Private Equity Real Estate, there are more than 60 private equity real estate funds currently in the market targeting in excess of $35 billion.
Much of the capital flowing into the sector is funneling through placement agents, the middlemen known for their skill in connecting money managers with willing investors, and vice versa. And as more and more investors eye real estate investments, placement agents who specialize in the sector say they are seeing a lot more activity.
“It's a good time to be a placement agent,” says Michael Crawford, a placement agent with CP Eaton.“You figure, as much money is going to be raised in 2006 as was raised in 2000. In the true private equity world of real estate, the numbers are pretty staggering.”
“The best investors today are hunters, and the best placement agents can help those that hunt.”
But in this environment of ever-ready capital, could placement agents become the victims of their own success? As GPs and their funds grow bigger and bigger, many are developing long-standing relationships with investors, relationships that often do not require an intermediary.
According to the Kingsley research, capital flows to real estate have been growing steadily since a 2002 low of $28 billion, rising to $51 billion in 2005. Pension plans worldwide have been increasing their allocations to the sector, and have been followed by endowments, foreign investors and high net worth individuals. The number of new funds that have come onto the market in recent years has been significant. And Crawford estimates that there are probably 15 funds looking to raise $1 billion or more, all of which would seem like great news for a placement agent. However, he adds, most of those large funds aren't using outside advisors to raise capital.
“The really good ones don't need agents, they know everybody,” says Crawford. “Why do they need me to go raise Lubert Adler Fund IV? Everybody knows who Lubert Adler is; their numbers are terrific. They don't need me to reintroduce them to people they already know.”
David Kirby, a placement agent with Kirby Associates, agrees: The larger and more experienced a firm becomes, the less likely it is to need his services.
“When a firm is raising Fund V, it has developed its own relationships with LPs, it has its own experience and track record, presuming it's good,” he says. “In many cases it has developed its own internal investor relations function, a specialist within the firm.”
It is perhaps inevitable that as a private equity real estate firm grows larger and more developed, it will acquire the resources to handle its own fundraising efforts. The question for placement agents has become how to adjust to this changing reality. One strategy has been to target younger, more inexperienced GPs who do not have the breadth of LP contacts of a larger firm.
“Most placement agent groups are focusing on where they add value, and that means focusing on newer, younger groups,” says Kirby. “They're continuing relationships with existing GPs, but typically for a smaller, limited, more specialized relationship or role.”
Raising a debut real estate fund can be hard work. New firms must present themselves in the best possible light to investors who are often hesitant to partner with a GP that doesn't have a proven track record. This is where the skills of a placement agent can be the most valuable.
“Raising your first-time fund is a very tough proposition,” says Paul Dougherty, a principal with Perseus Realty Partners, which just held a first close on its first fund.“You hear a lot of ‘no’. Placement agents can help you break through; they'll probably have a better handle on people who are willing to take a flier on a first-time fund.”
Nevertheless, this situation can be a bit of a catch-22. Investors aren't the only ones who are wary of betting on a firsttime fund: Established placement agents can also shy away from an untested firm. Dougherty says he actually ended up not using a placement advisor because the ones he wanted wouldn't take on such a small assignment—he only wanted to raise $150 million. In the end he decided that using his own contacts would make more economic sense.
“It's a good time to be a placement agent.”
“Some of the bigger placement agents that we wanted to do business with won't do first time funds,” he says. “We felt we had enough contacts out there to raise this money. We weren't raising a billion dollars; we were raising a relatively small amount of money by today's standards.”
Michael Crawford agrees. He notes that many placement agents are unable to take on new funds given the size requirements of many investors.
“First funds are always the hardest,” he says. “While we might get involved in a first fund, if it's less than $250 million, it's probably not economic for us to get involved. Anybody who can't write less than a $25 million check needs to be in a minimum $250 million fund. They can't be more than 10 percent of the fund. And if I can't call anybody who wouldn't do less than $25 million, I've just eliminated a big piece of my audience.”
Crawford says the ideal place for a placement agent is in raising the second or third fund; by then a firm has a proven track record yet has not had sufficient time to develop extensive contacts. This may seem like a small window of opportunity, but he adds that there are two ways in which a placement agent can add value to a more established fund manager: topping off a fund and providing expertise.
“Topping off,” Crawford explains, occurs when an established GP has raised a portion of their target, but needs a placement agent to help them fill the rest. “Let's say the guy comes to us with $700 million, he's got 20 LPs, and he really wants to get to a billion,” he says. “If he wants us to find him that last $300 million, we can do that. You ask, ‘Who have you not called? Where have you not gone?’”
Beyond that, placement agents can also be useful to later funds by providing expertise. David Kirby says that as GPs and LPs increasingly develop their own contacts with each other, placement agents are increasingly fulfilling the role of advisor rather than simply matchmaker. Or, they may use a placement agent to tap into an investor pool they haven't dealt with before.
“GPs want to know how to position themselves to be attractive to a particular investment group,” Kirby says. “Part of my role is to develop a strategy and a positioning that will result in the GP being successful in its fundraising.”
For instance, Kirby says his firm is currently raising a fund for a group that's been in business for more than 10 years. Although the GP is on a high fund number, they sought out his services because they wanted to change their investor base.
“Heretofore their investor base has been exclusively family offices and high net worth investors,” he says. “Now they are substantially increasing their fund size and want to broaden their investor base to include institutions. So in this case you have a highly experienced GP with a high number fund, where you would ordinarily think the GP may not retain a placement agent. But because of the nature of this fund, they need assistance on how to position themselves to be successful with such a new investor group. To me, that's an exciting prospect because I'm dealing with a group that is experienced in its sector but inexperienced in what it wants to achieve with investors.”
“What you need an agent for is to help you position your strategy in a crowded market.”
In cases like this, placement agents provide more value through their expertise than their contacts. By developing a strategy with a GP, they're able to use their market knowledge to advise the fund how to best proceed. The GP may already know the investors they want to target, but they may not know the best way to go about doing it.
“If we were to hire Credit Suisse, they're pretty much the leader in that market,” says Dougherty. “They've been there, done that a thousand times so they know the little things, how to approach investors, when to hard sell and when to soft sell, and when to not sell at all. They also know the whole process of the road show.”
And with so many funds out there, a key part of that road show is presenting the GP in a way that makes it stand out.
“If GPs are raising $50 billion worth of funds, then there's well over 50 funds in the market,” notes Crawford. “I mean, the numbers get sort of staggering. What you need an agent for is to help you position your strategy in a crowded market.”
For his part, Dougherty says he will probably use a placement agent for Perseus's next fund. “I think I've learned a lot in the process, and maybe in hindsight a placement agent would have been useful,” he says.
One area in which placement agents are increasingly providing expertise is in attracting global investors. US private equity real estate funds have been eager to attract international investors, but are often lacking sufficient contacts to do so. A placement agent can be the key to bridging that gap. David Kirby says he often gets assignments specifically for a given geographic area, while the GP recruits the rest of the investors. The Middle East, for example, is one region that placement agents are increasingly targeting for potential LPs.
“The Middle East is awash with capital right now,” Kirby says. “A large portion of it is being deployed within the region, but there is also capital for investment in the US and Europe.”
CP Eaton's Crawford agrees that international contacts are essential to a placement agent today. “The international perspective is important,” says Crawford. “We chose five years ago to put people on the ground in London. About 20 percent of the dollars we raise come from international sources as a general rule.”
However, Crawford adds, private equity real estate presents its own unique challenge in shoring up international investors.
“It's tricky because international dollars have a hard time investing in US real estate because there are tax ramifications that penalize them,” he says. “If you think about capital-raising for real estate, it's not easy. Structural tax considerations make it unfavorable for off-shore investors.”
International contacts, of course, can also work the other way around. These days many US institutional investors are also looking abroad, and placement agents are lining up to make the connections. At Kirby Associates, for instance, the firm is working with a GP based abroad who wants to diversify his investor base and bring in as many US LPs as they can. Kirby is aiding them in that process.
Although the growth of the asset class may be driving larger GPs to bypass placement agents altogether, that growth, according to some LPs, may actually make placement agents more valuable. Ed Schwartz is co-founder of ORG Real Property, a portfolio management company that invests for pension funds, endowments, foundations and public funds. He says that placement agents add the most value by acting as gatekeepers, picking and choosing the best emerging GPs to present to potential investors.
“There's been such a proliferation of investment managers and opportunities that placement agents really do provide a very useful service in today's environment,” he says. “In the old days, you would post your announcement to the press, and people would come to you. You were more of a gatherer. The best investors today are hunters, and the best placement agents can help those that hunt.”
“The most significant thing they can do for us is identify and introduce us to groups that we've never seen or heard from,” he adds.
However Schwartz added that in his experience, he rarely uses placement agents for advice or insight. “We have not met a placement agent that really adds a lot of value to that process,” he says.
It may be that different groups need different things from placement agents, but the days when placement agents were used solely to make introductions are gone.
In today's world, placement agents wear many different hats.