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Placement agents: Adapt to succeed

As the private equity world has become more diversified and complex, Greg Gille explores how placement agents have evolved to exploit new opportunities and overcome new challenges

With a record number of funds in the market, significant appetite from institutional investors for private equity, and a need for GPs to devise strategies able to stand out from the crowd, all the signs should point to a buoyant time for placement agents.

"If you look at the US, at the moment, fewer GPs are using a general placement agent as they are not scaling their funds like they used to," says MVision founder Mounir Guen. "Meanwhile, in Europe, fundraising is still more about story-telling, positioning, rebounding after issues. In addition, European funds are still in the transition of becoming more sector- and region-specific, which again is a positive trend for the placement industry."

Indeed, the industry seems to keep benefiting from strong fundamental drivers. According to the 2016 Prequin Fund Manager Survey, more than half (54%) of GPs on the road are currently using an agent; as Guen points out, that figure is higher in Europe than it is in the US, and the proportion has been climbing over the past few years. Besides, these relationships are among the longer lasting when looking at the broader fund services space – GPs logically tend to review these contracts when going back to market rather than every two or three years – but, at the same time, the renewal rate (around 50%) is sufficient to ensure business can be won over from competitors, and newcomers have a chance to carve a niche.

It was clear to us that as the industry was evolving there was an opportunity for the placement agent to play a greater, more strategic role with GPs" - Scott Church, Rede Partners

But recent news has shown that players in the field face challenges nonetheless: boutique firm Amala, founded in 2008 and headed by industry veteran Ian Simpson, will wind down in 2017. Simpson told Unquote in early February that the potential ramifications of Brexit would most likely require expanding, and he pointed to a lack of scalability, borne of the boutique nature of the business, as a reason not to go down that path: "Amala never split the origination and distribution parts of the business into two teams, as we felt combining the two would enable us to be better advisers and better advocates for our clients. This is a great model, but by nature it is very difficult to scale and do more than two to three placements a year, as you are lacking that dedicated team actively chasing new business."

Most practitioners approached by Unquote point out that regulatory and compliance constraints mean "one-man bands" are now tougher to operate and the need for scale also finds its roots in the necessity to evolve beyond simple placement. Says Antoine Dréan, founder of fund advisory firm Triago: "Running a small shop with just a handful of staff is very difficult nowadays. At some point you have to take a risk and commit to your strategy if you want to grow and that inevitably means building up the team."

Beyond the Rolodex
The downturn in private equity investment and fundraising that immediately followed the collapse of Lehman Brothers has meant GPs have had to reinvent themselves to meet new needs from LPs. Not surprisingly, placement agents have had to do some soul-searching of their own to better advise fund managers and navigate their own competitive field.

"When we set up, we used to encounter two major banks about 90% of the time," says Guen. "We see a lot of boutique or niche players now. The banks tend to focus more on the structured secondaries advisory side now and you can see that traditional placement is not as core as it once was for them."

Nicolas Vagner from UBS Private Funds Group does not disagree, saying that the larger, long-established players have had to evolve as well. "Access to LPs has more or less become a commodity and can largely be covered through a subscription to a database," he says. "Our value-add model relies on helping emerging and established fund managers build or further scale up their businesses, as well as resolve complex situations through creative liquidity solutions."

If just a few of the fundraises end up taking much longer than originally anticipated, resource-constrained agents can easily become misaligned with their clients and end up under-delivering, leaving all parties disappointed" - Nicolas Vagner, UBS Private Funds Group

Vagner notably points to the work done with smaller, first-time funds such as NorthEdge in the UK or Emeram in Germany. This dynamic is compounded by the fact that most of the larger buyout houses have been busy diversifying their product offering in recent years and building up their internal investor relations teams, to the point that placement agents are only needed for marginal top-ups, if at all (EQT being a case in point).

This approach echoes that of MVision, with Guen being keen to highlight the firm's preference for building managers from scratch in emerging geographies such as Latin America or niche sectors. Meanwhile, Rede Partners' founders identified a market gap in 2010-2011 and therefore did not have to go through that evolution phase – the business was born as part of it.

"Adam Turtle and I shared some of the same frustrations with the way placement had been done and saw an opportunity for a different approach in a more mature market," says founder Scott Church. "It was clear to us that as the industry was evolving there was an opportunity for the placement agent to play a greater, more strategic role with GPs. For example, thinking that placement is about introductions is somewhat antiquated. It is not just about hitting fundraising targets, but also about optimising the LP base and achieving other strategic objectives. The service is really more about helping GPs articulate their approach as being differentiated and often advising on how to evolve their strategy."

One of the earliest and most obvious avenues of diversification for placement firms have been secondaries – most firms will now have a dedicated practice and team to advise on or intermediate these transactions. In more recent years, the trend has been to combine contacts and know-how on the primary side with that secondaries capacity, and ultimately aim to offer a one-stop solution for a deeper and wider approach to advising funds throughout their life cycles. Says Triago's Dréan: "We are undertaking more and more integrated mandates that will encompass primary, secondary and more strategic elements."

Holy Trinity
That trinity of wider strategy advice, primary placement and secondaries work is what most established players have now settled on, with varying levels of separation or integration depending on their size and strategic objectives. UBS, for instance, is now split into three poles when it comes to fund services: an advisory team working on clients' overall strategies and dealing with the documentation; the distribution team; and a secondaries arm. UBS initiated that transformation after the crisis in 2009, as it avoided focusing too much on traditional placement mandates for larger, big-name funds.

Triago, meanwhile, most recently focused on developing its strategic advisory side, offering M&A-style advice to GPs and funds-of-funds on how best to capitalise on consolidation opportunities within the industry. Rede's team-building efforts in the past three years have been focused more on the secondaries side, as the firm is making more inroads in that market, as well as into the co-investment space.

A natural consequence of that evolution is that most firms now have to look beyond volume and take a more qualitative approach in order to add value, generate higher margins and ultimately secure repeat business. Most agents have caught up to the fact that the service is not just about meeting fundraising targets anymore – but letting go of the sales mentality, whereby one is just focusing on raw numbers, can be a real challenge. Rede's Church points out that the firm has made a conscious effort to focus on offering a more comprehensive service, while at the same time staying disciplined on the number of mandates it takes on.

UBS came to a similar conclusion, according to Vagner. "While it could make sense for specialist boutique agents to help established fund managers opportunistically raise discrete amounts of capital on a regional or local basis, there is real platform risk in taking on a large number of aggressively priced, narrow ‘top-up' mandates," he says. "If just a few of those fundraises end up taking much longer than originally anticipated, resource-constrained agents can easily become misaligned with their clients and end up under-delivering, leaving all parties disappointed. We prefer to focus on a smaller number of clients at any given time and only secure full-scale mandates where we have the conviction we can add significant value."

Eyes on the road
In addition to dealing with such strategic issues, placement agents will also have to contend with the eventual impact of the various potential Brexit scenarios when it comes to placing UK funds on the continent in the near future. A "hard Brexit" option, for instance, is likely to make life much harder for smaller agents without a base in the EU, although the precise requirements are hard to predict at this stage.

This uncertainty as to whether it would need to open new offices is mostly what led Amala to call it a day, according to its founder Ian Simpson. Larger players, meanwhile, appear less concerned. "Brexit is just another bump along the road; there have been more of these before, and there will be more to come," says Church. "Of course, we are looking at the impact both from our own business's perspective and for our clients, but we are not anticipating challenges we and the industry cannot deal with. It is not beyond the realm of possibility that we would look at an EU-based office in the next few years, but we're not committing to anything yet."

Triago's Dréan is equally confident: "The Brexit challenges add an extra dimension of reflection when working with UK managers – although, as we saw with the Mayfair fundraise, the effect can ultimately be negligible. As for our own business, we have been based on the continent for a long time and opened our London office in 2016 so licensing issues are not on the horizon for us."

The successful placement agents will be the ones that manage to find the right combination of strong compliance and a sense of entrepreneurship" - Ian Simpson, Amala Partners

A more pressing challenge could be to anticipate the next structural evolutions of the private equity industry. While players in the placement space have largely succeeded in tweaking their offering to better suit a changing market post-crisis, Vagner warns against complacency and says that always keeping an eye on the horizon is a must: "Increased regulatory complexity is a challenge for our entire industry, although size really helps deal with that. With increasingly sophisticated GP and LP communities, the real risk that established fund placement businesses face is complacency. The key mitigant for us is to identify new trends early and position ourselves to take full advantage of such opportunities – which we have done in the private debt space and around GP-led restructurings a few years ago, for instance."

This risk of complacency can be particularly acute in the areas of the market where agents will initially be the most relevant – such as first-time funds, or smaller players moving from funds with a reliance on high-net-worth individuals to having a more institutional LP base. A partner at a mid-cap GP says his firm, and their immediate competitors, are always wary of diminishing returns from using agents on successive funds, whereby they will end up paying higher fees for less impact on the outcome: "While we used agents for our previous funds, we will not be raising double the amount for our next vehicle – and, bar unforeseen circumstances, our LP mix should remain broadly similar. So I don't think we will be using an agent next time, and if we did, it would probably be on a retainer basis rather than a success-only basis." Hence the need for placement agents to constantly find new ways to add value, tweak their terms and anticipate their clients' own evolution.

Regardless of wider strategic considerations and the need to scale their business, placement agents will always have to keep an eye on the fundamentals: dissatisfaction with the service is usually viewed as the number one reason for GPs to switch agents, while it tends to be less of a concern for other fund service types, where cost issues are more prevalent. "It is obviously an industry with a lot of competition – the key for us is to get people that are hungry, and to see alignment of interest when it comes to the approach and ultimately the success of the fundraise," says the mid-cap GP. And by sharing his view on the future of the placement industry, Amala's Simpson offers similar advice to his peers: "The successful placement agents will be the ones that manage to find the right combination of strong compliance and a sense of entrepreneurship."

Greg Gille Editor Unquote

Greg Gille joined Unquote in 2010 as a reporter, initially focusing on the French private equity market. He was promoted to senior reporter and then news editor, before becoming deputy editor in 2013 and online editor a year later. He is currently editor, overseeing editorial content in print and online.

Greg graduated from Sciences Po Paris with a Master's degree in media management in 2009. He started his career in Paris before moving to London in 2010.

Greg Gille Editor Unquote

Greg Gille joined Unquote in 2010 as a reporter, initially focusing on the French private equity market. He was promoted to senior reporter and then news editor, before becoming deputy editor in 2013 and online editor a year later. He is currently editor, overseeing editorial content in print and online.

Greg graduated from Sciences Po Paris with a Master's degree in media management in 2009. He started his career in Paris before moving to London in 2010.