Placement agents in a new place?

Placement agents have been dealing with an unusual level of scrutiny, leading to a more comprehensive look at how their practice actually operates. Asia Pacific, presenting a new raft of opportunities for LPs, is one of the most interesting and challenging test cases in proving grounds for the discipline.

Placement post the crisis

Aside from its broader financial impacts, the GFC brought immediate reputational difficulties for placement agents. Established firms have been quick to emphasize the distance between the play-to-play culprits and themselves. Steven Hall, MD at Brookvine Pty Ltd., speaks for many when he says, “Some isolated and reprehensible activities overseas, particularly in the US, have not helped the reputation of placement. However, these did not involve what I would term ‘genuine placement businesses.’ They seem to have been the work of unethical, rogue individuals.”

Some feel, however, that the placement community could have addressed the problem earlier. “Our industry is at fault for not creating general standards of practice, such as being registered with one of the major global financial industry regulators,” feels Ed Greene, Executive MD at Diamond Dragon Advisors Ltd. “It created an environment for imposters to distort our image.”

Today, reputational issues are not the only consequences with which placement firms are grappling. For one thing, the underlying level of investment activity is still a concern. “On average, private equity portfolios are not growing at this time, for a number of reasons, which have to do with the dynamics of returns, valuations, visibility, and the economic situation,” warns Mounir Guen, CEO of MVision Private Equity Advisers.

“This could be a situation that will continue for the next five years.”
Many LPs have also rethought their entire approach to the asset class, based on their experience through the crisis. In the view of Francois-Marius Garcin, owner and co-founder of Fidequity, many LPs “backed and invested in branded products they thought would scale. And they discovered that private equity doesn’t scale that much.”

“Post the GFC, capital raising is more difficult,” concludes Les Fallick, Chairman of Principle Advisory Services. “LPs are more risk-averse, and illiquidity is more challenging for many.” Guen confirms that, “even though there’s capital in the marketplace, accessing that is very hard. And it is extremely demanding.”

But the challenging environment for capital-raising comes with benefits as well as drawbacks for placement businesses. “The crisis has highlighted the need for placement firms,” asserts Greene. “Because investment capital has become restricted by the impact of the GFC, the need to toss a wider net is necessary for all managers – seasoned, new and emerging.”

Changing sources of capital

The GFC has exacerbated some existing trends in capital accumulation and deployment worldwide that could make the new fundraising environment particularly difficult. Many of the old pools of capital are no longer as abundant, and GPs may risk missing new sources that more market-aware placement agents can access.

Prevailing views on fund size have also created problems for placement agents. As Guen remarks, “larger funds will find it more difficult to raise their funds than others. And agents will find it harder to fill that gap, because it’s structural.” This is a disconnect between LPs and existing firms looking to re-up, which is going to cause continuing difficulties. “The ideal fund size for Asian funds is probably in the region of $300 to 500 million, but the ideal fund size from the [point of view] of established groups is probably $750 million to 1.5 billion,” Guen warns.

Some LP groupings have historically been less ready to back emerging propositions in any case, and are even more so now. As Garcin remarks, “Generally speaking, North American investors are still more keen and more able to sponsor newer initiatives. European investors remain conservative and are still in a wait-and-see mode.”

Added to this is the – probably temporary – legacy of the legal upsets. “There are some pools of capital, especially in the US, that restrict the ability to invest with a GP represented by a placement agent,” concedes Greene. “Obviously, this is problematic, and time will mitigate this overreaction. But for now, it does impact our ability to approach certain LPs.”

Placement in Asia

Asia Pacific ought in theory to offer an even better value case for placement agents than other environments worldwide. Vast and highly fragmented, with many new and untried managers unknown to the market and unused to setting out their investment case, should be ideal territory for effective and smart intermediaries.

The region’s local dynamics do tend to create significant differences in how placement works here. Marketing funds across borders is one component, but this is about more than geographical distance. As Garcin puts it, “Because Asian pools of capital are not truly mature for the asset class, the locals still have to rely on equity injections from the US and European markets.” With the exception of Australia, Asia has if anything, a historic bias against home-country LPs, with all the resulting added considerations for GPs and their placement partners. “It may be quite challenging for any GP based in a domestic market that doesn’t have a critical mass to have an offering that is relevant on a pan-Asian basis, let alone internationally,” Garcin cautions.

Furthermore, LPs, no matter how enthusiastic, are also now inherently more cautious. “The investors generally are more active in those markets than they’ve ever been before, but they’re slow to give their money away,” says Guen. “They don’t want to make mistakes. They go with safer bets, they take their time; there’s an element of slowness in the markets.”

Also, adds Fallick, “Relationships are particularly important in many parts of the region.” Japan and Korea are two prime examples of markets that require significant time and dedication. And, he says, “Exposure to private equity – and understanding of its constraints – is relatively scarce.” All the same, “because of this, placement agents can add a lot of value helping new LPs enter the asset class.”

Ultimately, though, Asia Pacific is likely to continue to offer fertile territory for the placement community simply because the number of investment-grade managers is relatively small. “The number of PE GPs to whom international investors may have access is fairly limited in headcount relative to Europe and the US,” avers Guen. And those who command access will benefit accordingly.

The contribution of placement

The benefits for funds do bear articulating, not least because some LPs are still skeptical of them. Greene for one feels the skepticism is unwarranted, for sound structural reasons. “As the industry has grown and gone global, there are few LPs that have the internal bandwidth to absorb the full set of options now being presented. These LPs underestimate the value of placement agents in developing strategies and managers.”

For many GPs, simply getting the story across is often a significant contribution. “Even the most seasoned managers often do not articulate their story well,” cautions Greene. “They often are unable to coalesce around a few salient points to capture the essence of who they are, what they do, and how they do it.”

GPs, especially new teams, are also not always fully aware of the demands of LPs in terms of presentation and quality of materials, and often unable to meet these requirements unassisted. Fallick is adamant on the potentially bad consequences of getting this wrong. “LPs are extremely sensitive to fund terms, fund governance and product design and specification,” he cautions. “If you want to have your product carefully considered for the market, you have to have up-to-date product design, governance and terms.”

Consequently, many placement agents expect to be involved at a higher level; they argue for a role in the structuring of a vehicle, and the drafting of terms and conditions. Hall claims that some firms are assuming a deeper, broader role that “extends well beyond more traditional fund raising to the incubation and development of new investment firms, assistance to GPs with the design and structuring of investment offers, all manner of broader business support, and the ongoing co-ordination of a GP’s IR activities.”

With such demands, though, goes a greater post-GFC expectation of some preliminary screening and due diligence by the agent. “People want to know what level of due diligence you’re able to do before you bring an offering to the investors,” says Garcin. “Investors will not rely on brands and perceptions any more. They want to know what sort of depth you will go into.”

Furthermore, Asia Pacific GPs would do well to remember that they are not the only game in town. “At the end of the day, it’s all about value-driven performance; and the underlying changes based on development are extremely pronounced in emerging markets,” confirms Guen. “But it isn’t just Asia. It’s Latin America – Brazil is doing phenomenally well. South Africa is doing outstandingly.”

Asia Pacific firms, should not rely on their own merits, nor the region’s macro story to carry the message through to LPs. Placement agents look likely to be major beneficiaries of the growth of LP interest in Asia – and equally essential to the further development of the regional ecosystem. 

Further reading

Speed bumps ahead for Asian private equity returns

• Performance
• 05 Oct 2010

What drives your private equity returns?

• Performance
• 05 Oct 2010

Funds of funds build LP returns

• Funds
• 07 Sep 2010

Caution: Lower returns ahead?

• Performance
• 09 Jun 2010

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