Iain Morse examines the role of placement agents in the private equity market
Private equity placement agents are intermediaries between those supplying and raising capital in the private equity industry and capital raisers are the general partners looking to finance their deal flows. By contrast, capital suppliers are a more diverse group, including pension funds, insurance companies, private equity fund of funds, hedge funds, private banks, family offices and a motley of others including rich individual investors and syndicates of the same. The role of the placement agents is to match supply and demand, making the right introductions for those on either side of the equation. Needless to say, the very big funds have less use for these intermediaries than do mid-level funds.
In part this is because big, international private equity houses like Blackstone or 3i can afford in-house sales teams and due to their longevity already have networks of long established investors. But in recent years, there has been rapid growth in the number of new private equity partnerships seeking to raise first-time capital. "This is where the placement agents have found much work," says Sanjay Mistry, head of private equity research at Mercer Investment Consulting. These new partnerships, like start-up hedge funds, tend to be very skinny organisations. Their business models are based on contracting-out as much back and mid-office functionality as possible. "The agents can play a useful role here particularly when partnerships are seeking to diversify their investor base," Mistry adds.
The growing role of placement agents is also partly a function of the type of risk carried by typical mid-market funds. These tend to be concentrated by industry or geography. Investors are showing a strong propensity to diversify their private equity portfolios, either by investing in funds or by mixing and matching a set of direct investments. This is where placement agents come to the fore. "We start by doing due diligence on those seeking to raise money," says Andrew Bentley, principal at private equity placement agents Campbell Lutyens in London. This is paid for by the partnerships out to raise capital, which opens the middlemen to charges of conflicts of interest. "But we know investors from past experience and about their portfolio requirements," Bentley says. This ability to put together a group of disparate investors is now a key selling point for the agents. "The investors need to trust us," adds Bentley. "They need to know we will give them good quality assessments of the underlying partnerships."
There are two broad classes of private equity placement agents, the genuine independents and those that are parts of larger groups, particularly investment banks. The independents also come in very different shapes and sizes. Some are global, some with only a national or continental footprint. All offer to undertake due diligence on fund raisers and offer this to prospective investors. "The strength and quality of our due diligence is crucial to investors," says Bentley, "It is what differentiates agents."
Of course, the pension consultants like Mercer and Watson Wyatt also offer to do research of exactly the same kind. "We may see an agent's research but always carry out our own and prefer placing client funds directly," notes Mistry.
But many European pension funds do not employ consultants in this role. ‘"We talk directly to pension funds in the Netherlands and Nordic region particularly," says Dermot Crean, managing partner at the independent placement agent Acanthus Partners.
A recent study by Private Equity Intelligence shows that at a global level Credit Suisse was the largest placement agent in 2007, closing 14 funds with an aggregate value of $39bn (€25bn), followed by Merrill Lynch, with 10 fund closures and $37.3bn raised. CSAM also dominated the US and European markets although it has no top 10 listing in Asia.
Independents are relatively more important in regional markets. In Europe, M3 Capital Partners, MVision Private Equity Advisers, Axon Partners, Monument Group and Campbell Lutyens are all in the top 10. The picture is similar in Asia, with six independents in the top 10. The data also cover a period in which large buyout funds dominated the market, and if they appointed placement agents they tended to select investment banks for this purpose. Some of these were involved in introducing capital to hedge funds as well as private equity partnerships.
It is too early to judge the consequences of the sudden fall in buyout deals for placement agents in Europe. Opinion is divided between those who argue that the agents' role will become more important to those seeking funds and those who believe that the agents will have difficulty justifying their fees in a depressed market. Within the placement agents community this is mirrored by a debate about whether banks will set out to cut their costs by making staff redundant or whether they will intensify competition with their independent rivals.
Meanwhile, there is general agreement among placement agents that the future performance of regional private equity markets is likely to show further decoupling. In the US, CMBS and securitisation expanded deal flows with cheap and plentiful credit fuelled the market and these have now largely shut down. Deal-specific equity-to-debt ratios are undergoing a major re-adjustment, mezzanine debt is making a re-appearance for deal funding and balance sheet investors are becoming much more important in the market.
The same is expected in Europe, but to a lesser extent with the mid-market remaining robust. Asia and the emerging economies are seen by all as offering the highest returns in the foreseeable future. From the perspective of the placement agents, Asia is also seen as a market where relationships remain relatively more important than in the US or Europe. Not surprisingly, a growing number of placement agents are now establishing offices in regional hubs like Hong Kong and Singapore.