For emerging managers, the use of Placement Agents to start a capital raise of a fund represents the most significant point for getting off the ground (and early on, scaling a firm). This issue has prevented many aspiring Emerging Managers from starting their firms!
There are several reasons for fundraising being so difficult:
The Limited Partner (LP) landscape. Although transparency has improved through efforts such as the #OpenLP efforts, it remains challenging for fund managers to assess which investors are genuinely active, the authenticity of LP interest, and the continuous shifting of investing mindsets due to the variables of external fund managers.
Reliance on family offices. From our experience in late 2019, nearly 70% of capital going into Fund 1 offerings are from family offices or high net worth individuals. Active family offices are hard to find, as they rarely market their investing activities. Additionally, each family office operates very distinctly (unlike institutional LPs that have more predictable decision-making frameworks).
Limited Partners generally prefer to invest in proven managers, placing much more weight on access than discovery. The appetite for untested entrants is typically lukewarm at best, and managers must cast a vast net to successfully raise a fund (generally 200–500+ LPs during a Fund 1 process). This process can be time-consuming with many false positives.
The amount of competition for LP capital is high. The number of emerging managers currently in existence (or looking to form) is 1,200+ in the US and growing. Additionally, the time between established managers coming back with fund offerings is two years (or less). It’s no surprise that the average fundraise typically spans 18–24 months.
The current environment. The pandemic has halted travel, leaving pitch meetings with LP’s limited solely to video and phone conversations. While this does result in a more efficient process, there are many LP’s (particularly institutional ones) that still place high weight on meeting a partnership or individual before allocating. It’s not apparent to me if the lift from efficiency has overcome the practical challenges of not having in-person meetings.
Not surprisingly, a question that I’ve gotten a lot this year from many emerging managers is whether they should enlist a placement agent. First, what do placement agents? Placement agents are generally making Introductions through their broker-dealers that assist managers in all aspects of fundraising, including helping with marketing materials, developing fundraise strategy, and reaching out/following up with LPs to increase the success of the raise and truncating it. In exchange, these placement agents typically take a 2–3% fee on capital placed along with at times, a competitive retainer regardless of capital placed.
There are a few main reasons for this:
1) Placement agents are particular in who they take on, generally opting for larger offerings where economics are more attractive (and those that represent a smoother path for the placement agent). Historically, outside of strategic exceptions, it has not been common for established placement agents to take on sub- $ 50MM offerings.
However, let’s revisit whether emerging managers should use a placement agent as there are now many individuals and boutique placement agents that will take on smaller managers. While I still lean toward no for the vast majority of managers, there is a business case to give fund managers more time to tend to other firm and fund building activities such as working with portfolio companies. If you do employ a placement agent for your raise, here are important considerations:
1) The placement agent has an LP base that is similar to yours. For example, if your network is solely US-based, it may be helpful to have a placement agent specializing in working with European or other offshore LPs. If you have institutional LP relationships, someone that specializes in family offices could be very helpful.
2.) The placement agent has clear alignment toward you and your vision toward the engagement. Discuss expectations on who will do what, how the product will be marketed, and how you will work with them throughout the process.
3.) The economics of the deal. While 2% on capital placed is typically the average, I have seen placement agents charge between 1–3% with emerging managers.
REO Capital has specialized in working with Emerging Managers since 2009 and has raised over $2 billion in new capital for Emerging Managers since then.