Man in the middle: Placement agents in Asia

Navis Capital Partners released the private placement memorandum for its sixth Asia fund in September 2008, seeking $1.75 billion. Two weeks later, Lehman Brothers collapsed, triggering the start of the global financial crisis. "We could not have picked a more difficult time to try and raise money," recalls Rodney Muse, the private equity firm's co-managing partner. "We had to re-invent the LP base and that meant casting the net pretty wide."

Many of the large institutional investors were simply not interested: their asset allocations had been thrown completely off balance and the priority was paring back private equity exposure rather than increasing it. No one was insulated from the crisis but those with relatively new private equity programs or those with a long-term approach and an interest in Asia were more realistic targets. It was just a case of finding them.

As Navis' placement agent, Campbell Lutyens had to drum up the right interest from the right people on the strength of the PE firm's past performance and its unique position within Asia.

"Navis has a strong focus on Southeast Asia but they've done deals in Hong Kong, China, India and Australia, so you can look at them as a pan-regional ASEAN specialist," says Conrad Yan, a Hong Kong-based partner with Campbell Lutyens. "LPs had already allocated quite significant amounts to China so it was a case of highlighting Navis' ASEAN expertise and explaining how it integrates with the rest of the region. It is a very useful piece of a regional portfolio."

The private equity firm reached a final close of $1.16 billion in August 2010. Navis Asia Fund VI is seen as an example of effective collaboration between GP and LP, but this is not always the case, particularly in Asia, where private equity is less mature and institutionalized.

"Placement agents are at the bottom of the pool - everyone hates them," says one Asian fund manager. "LPs see them as leaches and would rather deal with GPs directly. GPs always ask why they are paying the placement agent so much money and where is the value-add."

Different people, different needs

The problems are largely rooted in generalization. Not all GPs need placement agents: a mid-cap China growth capital firm raising a $250 million second fund probably wouldn't be interested, but a pan-Asian GP that is looking to diversify its LP base for a $1 billion-plus third vehicle may well value insight and introductions to European and US institutional investors. And not all placement agents meet the needs of GPs: a boutique two-man operation might suffice for introductions to a few Asian fund-of-funds but it is unable to match a global player at extending an in-house IR department, processing due diligence requests and parsing PPMs.

It is worth noting that the GPs who speak most glowingly about placement agents are those who have long-standing relationships with well established players. A long-standing relationship in Asia, however, is unlikely to stretch back more than eight years.

"We are currently active with seven clients in Asia Pacific, which would have been unthinkable 3-4 years ago. On average, we work with 6-8 clients a year in the US and Europe and we can now replicate that in Asia," Mounir Guen, CEO of MVision, tells AVCJ. "It's all driven by supply and demand. You just have to look at the number of potential investors and GPs in Asia now."

The rise of Asian private equity has seen global placement agents establish a permanent presence in the region. MVision and Probitas opened offices in Hong Kong in 2009, while Campbell Lutyens followed suit in late 2010. Eaton Partners launched operations in Shanghai in 2007 and arrived in Hong Kong last year, by which point Edward Greene had already left the firm to set up Diamond Dragon Advisors. UBS, meanwhile, has been in Singapore since 2006.

Several agents gained traction before this, flying in and out to handle mandates, but unfamiliarity with the services on offer remains an issue - and it cuts both ways.

The right size?

Although average fund sizes are rising in Asia, there remain relatively few large-scale vehicles that require a placement agent. The global buyout firms, now raising capital more or less continuously, run operations in house; it is possible that an agent might be asked to assist with a top-off, but it's a rarity. This leaves a clutch of pan-regional players and a few larger country-focused players.

If a GP isn't targeting a certain level of capital, a placement agent might not be interested. A Hong Kong-based agent tells AVCJ that the goal is to earn at least $5 million per mandate. Based on the industry standard 2% fee, the fund therefore needs to reach a minimum of $250 million but, in an ideal scenario, an anchor investor will have already committed around $100 million, so the target rises to $350 million.

For GPs, too, the economics just might not be justifiable. "If you are charging 2% and 20% in fees and carry, once you factor in the placement agent fee, your actual takeaway might be 1.25% and 15%," says one China-focused mid-market fund manager. "When you have leverage and momentum, it can make sense but right now the model doesn't work - you might be giving away your bonus pool for the next two years."

The fund manager adds that he would consider using a placement agent in the future, but his firm's capital-raising currently relies on word-of-mouth and there are no plans to increase fund size to the point where outside assistance would be necessary. Baring Private Equity Asia was in a different position. Last year, the firm took about six months to close its fifth pan-regional fund at $2.46 billion, well in excess of the original target of $1.75 billion.

Clearly, there was ample demand, so why use a placement agent? Baring declined to comment but Leighton Matheson, managing director of UBS' Private Funds Group in Singapore, who was involved in placing the fund, offers two possible explanations: UBS, as a global firm, could provide access to a broad spectrum of investors; and Baring was raising a large fund with numerous investors, including at least five North American public pension funds.

"Managing each individual due diligence process was an extremely resource-intensive job and we were able to provide Baring with streamlined support," Matheson says.

Navis' Muse and Frank Tang, CEO of FountainVest Partners, which used UBS for its $940 million fund in 2007, speak of similar experiences. Navis managed to raise its first three funds through Muse and Nick Bloy, the other co-managing director, reaching out to people they knew. It was acknowledged this wouldn't work when scaling up from $85 million in Fund III to $300 million in Fund IV; they didn't want to become over-reliant on a particular geography or investor type. Tang - well known in the region from his time at Temasek Holdings but still raising a debut vehicle - signed up with UBS because he wanted a diversified LP base.

In both cases, reaching out to a wider range of investors wasn't just a case of getting meetings with more people; it involved an administrative burden that was simply beyond the capacity of their investor relations teams.

"Each LP has its own requirements and you have to spend so much time organizing the process," says Tang. "A placement agent provides a centralized processing service, managing all the due diligence requests, follow-ups, logistics, and so on. We could do it ourselves but there would be an opportunity cost because we couldn't focus on other things."

The key point here is that the perception of placement agents as walking rolodexes that set up meetings and hand over email addresses in return for a fee is outdated. Some smaller operators will still offer to do just that, and charge a suitably low rate for their services, but more substantial contributions can be made elsewhere in the process. Yan of Campbell Lutyens is willing to put a number on it: 10% of the value-add comes through LP introductions, while the remaining 90% is tied to project management.

Hard to raise capital

This is not just a function of market evolution in Asia or the fact that most GPs get into private equity because they are talented investors, not skilled fundraisers. Due to tougher compliance requirements and reduced allocations to the asset class, investors globally have become more scrutinizing, routinely asking for more details from fund managers in areas such as strategy, track record, team members and compensation structure.

According to MVision's Guen, only 80 LPs are now in a position to make individual fund commitments of $100 million or more, down from 200 or so a few years ago. A select group of 15 investors still has the capacity to write $200 million checks, although rewind to 2007 and they would be happy to put in $500 million. Any GP seeking to raise $1 billion or more must get in front of these institutions and, if a commitment is forthcoming, manage their back office requirements. To what extent are fund managers able to accomplish this independently?

"Placement agents are very helpful in that they keep a lookout for new clients in between fundraises - something we don't necessarily have time to do," says one Asian fund manager who has used Probitas on more than one occasion. "When they find an LP that's interested, they put them in touch with us so we can build a relationship. By the time you start fundraising, having an established relationship with LPs helps you get across the line."

Level of involvement

The degree of placement agent involvement in the fundraising process itself largely depends on the GP's experience and specific requirements. In the case of an exclusive mandate, it isn't unknown for the agent to sit down with a blank sheet of paper and draft the PPM. If the GP does it, the agent will typically offer feedback, for example flagging any structural issues that aren't market standard and could result in a challenging fundraise. It can also be common practice for the agent to take the lead in compiling all the due diligence materials.

"We have been in the private equity placement business for 15 years and typically work on 10-12 funds globally at any one point in time," says UBS' Matheson. "As a consequence, we understand what investors want, so in some cases are actually better positioned than the GP when it comes to compiling materials."

The preparation process can take three months or more, and then the road show begins. Just as Campbell Lutyens had to help Navis identify investors that weren't closed to new business during the global financial crisis, the priority is putting the fund manager in front of an LP that is a realistic target. No matter how much spin is put on the story, an Asian infrastructure fund won't get far pitching to an investor that only focuses on infrastructure vehicles that invest in OECD countries.

Beyond that, the placement agent is the second pair of eyes in the room, moderating the exchange between GP and LP and cross-referencing it with background knowledge on each party.

In this respect, it is easier to find common ground. A pension fund might be pushing for a 1.5% management fee, but the agent knows from past experience that they would be happy with 1.75%. A GP might propose a waterfall structure that sees management receive carried interest sooner than normal and it has to be made clear to an investor - strict on terms but keen on team stability - that the proceeds will mainly go to mid-level professionals.

Information on an LP can be of considerable value - existing GP relationships, investment strategy, particular areas of interest, even personal background. As one placement agent puts it: "I know what beer you drink; I know what you are doing at 5 p.m. on Friday night; I know that you had an argument with your wife last night and it would be best if the GP calls you next week rather than in a couple of hours."

Although Asian fund managers are said to be increasingly open to using placement agents, industry participants say that pitching to the uninitiated remains a challenge.

The nature of the pitch is crucial. Some GPs claim to have never used an agent, but this means they have never done so exclusively. It is not unusual for agents to be hired on limited mandates to help raise the last $50 million or provide support in certain geographies. Orchid Asia brought in Atlantic-Pacific Capital after the first close of its latest fund last year to work on selected accounts, while Palma Capital was hired to make inroads with LPs in the Middle East.

Opinion is divided on this approach, but it can work if efforts are properly coordinated. "Fundraising is like pushing a wet noodle across a table - you can do it but it's painful," says Dennis Montecillo, CEO at Diamond Dragon. "If two hands are doing it and they don't belong to the same person, it's even more difficult."

A select group of fund managers doesn't need to use placement agents at all. These include Hony, whose $2.4 billion fifth fund raised earlier this year was massively oversubscribed, and Boyu Capital, which attracted around $1 billion for its debut vehicle in 2011 thanks largely to the credibility of co-founder Mary Ma.

The long-term view

The criticism is one not peculiar to Asian GPs: chronic short-termism. Demand might be such that a manager can raise all the capital in the world right now on highly favorable terms from a wide variety of sources. However, building a loyal and satisfied LP base is just as important as recruiting a stable investment team. A sudden deterioration in the environment coupled with truculent investors refusing to re-up because their needs haven't been met, and the GP would be facing an entirely different reality.

"There was a well positioned emerging markets fund that recently decided to go it alone and investors ended up complaining because the GP wasn't build proper IR processes and no one knew what was going on," says MVision's Guen. "They didn't understand the market philosophy or the quality of investors they were working with. If it's raining gold around you, that's when you should be working twice as hard to ensure you are doing it right."

There is a general expectation that conditions will improve, driven by GPs' need to reach out to more investors as fund sizes increase and the simultaneous appreciation that the varied compliance requirements of large LP base are difficult to handle alone. Yet there are bumps in the placement agent-fund manager relationship in Asia that still need to be ironed out - aptly illustrated by two sides of the same story regarding CDH Investments and Credit Suisse.

The Chinese private equity firm was raising its debut real estate fund and hired a placement agent because it felt that its current private equity LP base wasn't necessarily a good fit. According to sources familiar with the situation, Credit Suisse successfully pitched for the mandate but CDH wasn't happy with the quality of staff deployed to work on it. The placement agent, for its part, is said to have been unhappy with the level of information and cooperation provided by the GP.

It is a classic chicken-and-egg situation, symptomatic of a market in transition. The GP wants to work with an established player that has an experienced team on the ground; the placement agent wants to work on a fund large enough and sufficiently cooperative to justify its outlay of time and resources. They have yet to find common ground.

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• Topics
• Advisory
• Fundraising
• Greater China
• Southeast Asia
• UBS
• Campbell Lutyens
• Navis Management
• FountainVest Advisors
• China
• Fundraising
• Southeast Asia
• Asia
• Eaton Partners
• placement