Fundraising is not easy; it is one of the more exhausting, humbling and frustrating processes GPs encounter. In perusing industry periodicals, one might conclude that anyone can raise a private equity fund and it can be done easily. The reality is quite different. But, most Placement Agents can help you with the process.
For the majority of managers, fundraising remains a difficult, unwelcome task with plenty of risk. A high-quality, full-service placement agent can play a valuable role and be a resource to GPs during the fundraise.
The benefits are more obvious for emerging managers or those with complex stories as agents can develop a strategy for the raise, help position the story, anticipate objections, process feedback, and take the bulk of the documentation work off the GP’s plate. Agents can also play a role with high-quality or high-demand offerings as they can de-risk the raise by providing guidance on optimal timing of launch, sequencing of LP approach, managing logistics, driving an efficient process, and advising on the allocation process.
While there are many considerations to ponder when considering whether to engage a placement agent or marketer to assist in early-stage fundraising, the existence of a retainer should not be viewed as a negative aspect. Expecting a high-quality, placement agent firm to burden the cost of creating and executing a successful marketing campaign might simply be unrealistic. While most first-time fund managers are aware of the investment required to recruit a high-octane team, many fail to recognize the similar significance in addressing the initial steps crucial to earning the trust and confidence of investors.
Many fund managers misjudge the level of interest in its product and its Fund; they fail to do any test marketing before the Fund launch to determine the Fund size and the markets interest in their Funds.
A manager unwilling to pay a retainer or invest in the growth of firm’s AUM can adversely affect the perception of the firm as well as its credibility in the LP community. By only considering “non-retained” placement firms, the manager is expecting a placement agent to make an exclusive investment in the due diligence and collateral development aspects of the campaign or is just skipping over those aspects altogether. This kind of relationship narrows the playing field to folks with small, resource-challenged teams that may not have the expertise required to complete the front-end work of a successful campaign. The existence of a retainer simply represents an alignment of interests, no different than the one demanded today between the GP and their LPs.
56% of first-time fund managers who did not use a placement agent failed to meet their goals for their investment pools closed in the 28-month period, according to Preqin. Only 30% reported exceeding their targets, compared with 47% of first-time managers who used a placement agent. Established and first-time managers who used placement agents had more success in exceeding their fundraising targets compared to those going it alone, a Preqin report this month shows. It’s worth hiring a placement agent when raising capital for private funds, according to research from alternative-assets data provider Preqin.
Emerging Managers (First-Time Funds/Spin-outs)
Hiring a placement agent is a critical step for an emerging manager looking to avoid the pitfalls inherent in any first-time fundraise.
Fundraising Strategy & Diligence Preparation
The planning stages for a fundraise can be just as important as the raise itself. If the GP doesn’t have a tight story and documentation is not well prepared, it can be detrimental to the raise. Placement agents can advise their clients on all aspects of the fundraise strategy (including identifying and highlighting the key attributes and differentiators of the strategy).
The Capital Raising team can help write the marketing materials, including the presentation, PPM, DDQ and supplemental diligence materials. The placement agent has a lot of experience working with LPs on diligence requests; therefore, they can anticipate diligence questions and topics before they become a hurdle in diligence. In some cases, agents can be helpful in identifying and
choosing counsel and outsourced back-office providers, which has become an important factor as LPs have increased their due diligence on fund operations.
Distribution: Equally as important to the planning process is meeting the right LPs in an efficient manner. LPs can be an enigma as it relates to understanding what drives investment decisions, how to make the pitch persuasive, whether the LP’s have capital to invest, and who is the right person with whom to initiate dialogue. The placement agent is constantly speaking with the LPs – both to understand their current portfolio and to gain a view as to what they are wanting to add in the way of new GP relationships. Placement Agents also know which LPs are realistic supporters of Emerging Managers! Our Distributions Channels are very different from most Placement Agents. 99% of Placement Agents overlook the RIA Channel for Investors. REO Capital has been working with RIA LP Investors from various firms since 2006!
So Why Use a Placement Agent –
The capital raising process typically takes much longer than anticipated, so entrepreneurs need to plan for that — then you will only be pleasantly surprised if it goes any other way. Despite this, there are things you can do to give your company the best chance of raising capital as quickly and efficiently as possible. A good tip to keep in mind is that you are going to be judged and compared by investors to your peers in your category. REO Capital knows which LP Investors invest in Real Estate or Invests in Venture Capital or Invests in Healthcare. We know which LP’s will work with Emerging Managers and those who will not invest in Fund #1. REO Capital is a unique Placement Agent that works with RIA firms that invest in Fund #1,2,3 etc…
So How Long Does it Take?
The timeframe and complexity of raising capital depends on the stage of your company, the sector of the business, and the management team running it. A general rule of thumb is ensuring you are prepared for at least 12 months of raising. A very quick raise may take 9 months, and a long raise may take 22 months. If you’re going over 24 months, it’s time to take a step back and consider why it’s not working and how to make your pitch more convincing and trusting.
Understanding and anticipating investor concerns is a great way to mitigate risk of issues arising during the raise which can prolong it unnecessarily. Consider who are the best LP’s to target for your Fund and the best locations whether it’s the USA or Europe or Asia or all three. Consider what time of year are you starting your Capital Raise? What is the Quality of your pitch and pitch materials (don’t underestimate the time and effort these need)? A Placement Agent can help you with all of these concerns.
Placement Agent is a cost effective way to outsource a Sales Business Development team while controlling costs such as Healthcare, Social Security, Unemployment Benefits, Employment Salary Costs, Federal and State Taxes, Recruiting Costs, Training Costs, and the cost of hiring internal staff personnel adds up to 300% more cost of a salary for each employee! It’s worth hiring a placement agent when raising capital for private funds, according to research from alternative-assets data provider Preqin.
REO Capital is a Placement Agent that specializes if raising capital for Emerging Managers even on Fund One.
The Value of a Placement Agent