The use of placement agents for private real estate fundraising has been steadily rising for the last two years, with the proportion of funds closed that utilized the services of a placement agent increasing from 37% in 2015 to 41% in 2016. This is still significantly below levels seen in 2015 when the majority (58%) of funds that closed used placement agents. From 2010 to 2015, an average of 55% of funds closed used placement agents, possibly brought upon by the need to increase fundraising efforts due to difficult conditions caused by the financial crisis. Comparatively, from 2015 through to May 2016, an average of 39% of funds closed enlisted the services of a placement agent, suggesting that fund managers may feel fundraising conditions have eased in the last few years. Additionally, many firms may have chosen to strengthen or build in-house marketing teams to save on placement agent fees in a bid to cut overheads.
Unsurprisingly, placement agents are used more by the largest funds $1 billion, with 63% of these funds hiring placement agents. This is nearly double the proportion of the funds closing at less than $500mn, and approximately 1.5 times more prevalent than the funds securing $500-999mn. The costs associated with hiring a placement agent to attract potential investors may be viewed as prohibitive for many fund managers; However there are some Placement Agents such as REO Capital that offer lower Retainer Fees which can end up being refundable. Additionally, the economics of working on larger funds are significantly more attractive for the placement agent. Which is why there has been an increase of placement agents who specialize in raising capital for Emerging Managers who’s fund sizes are $100mm – $500mm in size. REO Capital, LLC came into the marketplace in 2010 to assist those general partners who are working with funds less than $1 billion!
Using a placement agent has a positive impact on the likelihood of a fund exceeding its target size, with 9% of funds that closed in 2015-2017 doing so on target, and 52% surpassing their initial fundraising goals. Among the funds that closed significantly above target was JER Real Estate Partners Europe III. Park Madison Partners was hired to help raise capital for the fund, which closed on €809mn, $509mn above its initial target. In comparison, 52% of the funds that did not use a placement agent in that time period closed below their target size compared with only 40% of funds using a placement agent.
The largest ever Europe-focused fund, Blackstone Real Estate Partners Europe IV, secured its record €5.1bn close in March 2015, with the assistance of its placement agent Park Hill Group. Greenhill & Co. helped DivcoWest Fund IV secure its $976mn close in H1 2014, and M&G Real Estate Debt Fund III secured £250m more capital than its target with the help of its placement agent First Avenue.
The issue with using a larger placement agents is the problem of duplicating and competing capital raises because these larger placement agents are working on 30 or more funds per year. Smaller placement agents like REO Capital only works with 5 or less funds per year to avoid duplicating and competing fundraising. Smaller placement agents also use different limited partner investors such as REO Capital who works with Wealth Management firms, Registered Investment Advisors, Single Family Office, Multifamily Offices, and High Net Worth Investors as well as Corporate Pensions, Endowments and Foundations.
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