PRIVATE FUND PLACEMENT AGENTS: Valuable or Not?
The process for sourcing capital for funds has changed dramatically in the last 15 years while the Placement Agent process has essentially remained the same over this time period.
In current market conditions, successful fund capital sourcing usually requires the fund manager to have a broad set of their own relationships and for the fund manager to build a successful brand (much like success requirements for most other products).
Therefore, the value of institutional “relationship transfer” from a Placement Agent to a successful capital raise is reasonably low while a process for the fund manager to build their own relationships and build their own brand has a much higher value and success rate. Deer Isle believes that it is important for a fund Capital Seeker to use a technology solution to reach as many potential Capital Providers as possible so that the fund is always brand building, building their relationship network and reaching as many potential Capital Providers as possible such that the capital raising top of funnel is always being developed.
The data supports this market change1 – in 2017, a Placement Agent, on average, decreased the fund-raising time by approx. 10 months while in 2021, on average, using a Placement Agent increased the fund-raising time by approx. 2 months.
| 2017 | 2021 | |||
| Avg Months | Median Months | Avg Months | Median Months | |
| Without a Placement Agent | 26.4 | 16 | 16.6 | 12.6 |
| With a Placement Agent | 15.4 | 15 | 18.6 | 18.3 |
| Number of Funds | 5314 | 5273 |
1https://pitchbook.com/news/reports/q1-2023-pitchbook-analyst-note-the-role-of-placement-agents-in-gp-fundraising
Interestingly, the difference between the median months for funds without a Placement Agent is large (approx. 4 months) which seems to indicate a large dispersion in outcomes if there is no Placement Agent. A short time if a Fund has relationships and brand/ a very long time if not.
The reason that the process for sourcing capital for funds has changed is because Alternatives has become a mature asset class – ie: most institutional Capital Providers or Asset Allocators are fully allocated (approx. 20% of their portfolio) and, perhaps, given the denominator portfolio effect, may now be over allocated. In becoming a mature asset class, not only has trillions of dollars of new capital stopped being allocated to the asset class but also there is a bandwidth constraint at the Capital Providers.
The Capital Provider bandwidth constraint is that each portfolio manager at an Asset Allocator can handle the reporting and monitoring of approx. 20 funds. Therefore, if the Capital Provider has 5 portfolio managers, then the total number of funds that can be in their portfolio is approx. 100. It is likely that they are de facto allocated to closer to 150 or 200 since they have been speaking to some fund managers and telling them “as soon as we have liquidity in your investment area, you will be on the short list for consideration for an investment”.
This bandwidth constraint compares with the situation 15 years ago when there were few funds in the portfolio (maybe 15) and the Capital Provider was trying to get to the fully invested 100. So, the Capital Provider had “85 degrees of freedom” and had plenty of room in their portfolio for a new fund.
Capital Providers now make their investment decisions based upon portfolio considerations and standard structures. Given the standardization of a mature asset class as well as a better understanding of a robust due diligence process, most Capital Providers make their investment decisions based upon asset allocation decisions as well as undertake their own due diligence process.
Deer Isle believes that Placement Agents/intermediaries have value-add in the capital sourcing process; the value-add is not in relationship transfer.
Instead, the value-add is in helping a fund prepare for an institutional capital raise since Placement Agents/intermediaries know the type of information that Capital Providers want to see and how to prepare it.
In addition, Placement Agents/intermediaries can help a fund manager close any interested parties since closing is complex and if someone has experience closing, they are more likely to be able to navigate a complex closing process and help ensure a successful closing.
Consider using Deer Isle’s unbundled capital sourcing services, that are built upon D.I.G. Beacon, our Fintech solution which enables a fund, on a white-label basis, to reach their Total Addressable Capital Market from a universe of over 10,000 US institutional (fiduciary) investing organizations. Beacon outcomes are enhanced by our Strategic Capital ConsultingTM services that help prepare for a capital raise as well as our Closing Advisory services that help ensure a successful closing, for capital raising success.
