Placement agents: Tapping tomorrow's investors

Tuck Furuya and his colleagues are on an advocacy drive. As the team behind Ark Alternative Advisors, a boutique Japanese placement agent firm set up in late 2010, their mission is educate domestic pension funds on the virtues of private equity. Last year, they did approximately 1,300 one-on-one external meetings, most of them with a stable of 300 pension fund targets, plus a string of seminars.

With the $1.26 trillion Government Pension Investment Fund (GPIF) exploring opportunities in infrastructure and private equity, there is renewed interest in this constituency of potential LPs. Should GPIF make the jump, smaller counterparts could follow, opening up a pension fund market that currently has a less than 1% allocation to private equity.

A lack of familiarity can lead to misconceptions. "When pension funds hear the word ‘alternatives' they usually think real estate, hedge funds and then private equity. And a lot of people still believe private equity equals venture capital," says Furuya, co-founder of Ark. "They hear stories about people losing money in VC and say they don't want to invest. We have to tell them there are more strategies to it."

Some of Ark's meetings are the start of more meaningful relationships; others arouse no interest on the LP side and offers of follow-up briefings on the market are politely declined.

These 300 pension funds occupy a layer of the LP market to which few international placement agents have exposure, perhaps with good reason. Yet they also represent one end of a sliding scale of institutional investors in Asia that are either untapped and one day feasibly could be tapped, or actively looking to add to their private equity investments.

Be the bridge

Placement agents can clearly play an important role in helping these groups develop their exposure to the asset class while at the same time advising international and regional GPs on what the LPs are looking for and how best to approach them. Every major agent AVCJ spoke to expects headcount to grow as the region becomes more significant as a GP client base and a distribution market. The question is how and at what pace this expansion is managed.

In a market where it is estimated at least three quarters of the capital entering global private equity comes from less than a quarter of the LP base, dominated by a handufl of sovereign wealth funds, developing relationships in smaller, less exposed segments offers no immediate pay-off. It can also be a challenging and costly endeavor, involving numerous partners, cultural and language barriers, and a still developing regulatory landscape.

But for many it is a necessity. "We are actively speaking to the next tier of investors who are thinking about being active in private equity and we position ourselves to be a valuable resource to them as they look to build out their programs," says Thomas Swain, vice president in Credit Suisse's private fund group.

With this in mind placement agents might not follow the standard rule of spending 80% of their time with the 20% largest clients; the focus on business development would put it closer to 60-40.

"The 80-20 approach might serve you well for the next five years, but you do need to develop relationships and some level of comfort with these new investors," says Conrad Yan, a partner at Campbell Lutyens. "If you are just focusing on 20% of the clients today you will end up behind the curve constantly."

Broadly speaking, Asia-based institutional investors with a remit to do private equity fall into three categories: the regional offices of US and European groups such as fund-of-funds and a smattering of pension funds; indigenous Asian fund-of-funds; and local institutions, including sovereign wealth funds, insurers, banks, family offices of reasonable size and a few endowments.

The first two categories number around 50, they only invest in Asia, and their clients still predominantly hail from developed markets. The third category invests globally and is harder to quantify - it ranges from Japanese banks and Singaporean sovereign funds that have been investing in PE for over a decade to the more nascent pockets of capital.

Javad Movsoumov, executive director of UBS' private funds group in Asia Pacific, says there are approximately 100 LPs in the third category that his practice actively tracks and pursues.

The Asia investor relations (IR) head of a mid-size global PE firm puts the number of investors actively committing to the asset class at 150 - compared to 700-800 in the US - and estimates he has covered about 60% of the market. Having said that, about 90% of the capital he has raised in the region comes from the largest 5-10 LPs.

The implication is that the market is as large as a group's remit and resources allow.

One independent agent divides his category three universe into sovereign wealth and government-controlled pension funds in China, Korea, Hong Kong, Singapore, Brunei, Malaysia and Australia; small to mid-size insurance companies in Taiwan, Japan, Korea and Hong Kong; superannuation funds in Australia; and asset managers and other financial groups in Hong Kong and Japan.

With the exception of Japan and Australia, there may be no more than a couple to a handful of targets in each market.

There is a meaningful family office presence in Hong Kong and Singapore, but it doesn't figure so strongly; other placement agents have more of an appetite for the high net worth segment.

A good fit?

The extent to which a placement agent deals with different groups depends on the kinds of products being marketed. The very large private equity firms have sufficient in-house IR resources that they require little if any third-party support. With some honorable exceptions, placement agents tend to steer towards the middle market.

Accessing the Asian LP base is now a routine agenda item for GPs of this size from the US and Europe but they are not always a good fit for the big name LPs that appear on wish lists.

For example, a number of Asian sovereign funds have a minimum check size in the region of $100 million but at the same time don't want to account for more than 10% of the total corpus, which rules out anything below $1 billion. Other investors might be just beginning their programs and the tendency is to go for big brand names that are easier from a due diligence perspective.

Robert Mast, managing director at Monument Group, recalls competing for a global mandate before his company set up in Asia this year. Monument told the manager that while it could deal with Asia out of Boston, it thought most of the capital would be raised out of the US and Europe. The firm ended up losing the mandate to a rival that had emphasized its on-the-ground capabilities in Asia. The fund ended up raising no capital out of the region.

"You have to manage their expectations as to what Asia is really about and help them understand the LP base and its demand," adds Vincent Ng, partner at Atlantic Pacific Capital. "There has been a lot of hype about large Asian LPs, particularly sovereign wealth funds, but many of them might not be set up to do a fund of a certain GP's size or strategy."

Intermediation is another factor. The amount of time a placement agent or GP spends with the LP depends on the level of discretion. If a government pension fund awards a managed account mandate to HabourVest Partners, for example, a US mid-market buyout fund and its placement agent would spend more time in Boston than in Asia.

With an advisory relationship there is more leeway. "A US buyout fund would see my office in the US, me in Hong Kong, and the client," says Juan Delgado-Moreira, managing director and head of Asia at Hamilton Lane. "My clients are generally happy to meet GPs."

With the exception of Australia, where advisors play a hands-on role in shaping superannuation funds' programs, Asian LPs are not seen to use gatekeepers in the same formalized way as their US counterparts.

There are different approaches: Hong Kong Monetary Authority is said to channel funds through an advisor if they fall below $3 billion in size; Malaysia's Employees' Provident Fund (EPF) reportedly used to deal with Asian GPs directly and relied on advisors for international coverage, although it is said to be increasingly willing to address more markets independently.

Processes can be highly tailored across the region. LPs use different advisors for different strategies and pick their desired level of involvement in due diligence prior to presenting a proposal to the investment committee.

"It is not a standard US-style gatekeeper relationship - very steady, very long term, and very collaborative - because the market is not as mature, it's only in the last couple of years that some of these people have been allocating capital. Here it can be more one-off. They say, ‘Who can help us? Raise your hand,'" says Weichou Su, a partner at StepStone Group.

One GP adds that gatekeepers and LPs sometimes give different answers when asked how much discretion there is over a portfolio. His general view is that Asia is moving towards advisory relationships that serve as a check and balance rather than a substitute for in house work, ultimately because many want to learn how to do it on their own.

Value proposition

It is part of the placement agent's job to know who to approach and how to approach them. A US mid-market buyout with a small IR team would find it difficult to function in Asia without the assistance of a placement agent. But even a GP with resources in Asia might still need help.

An IR executive could be spending three in four weeks on the road predominantly visiting existing investors. A placement agent can pitch in not only with coverage and project management but also by contributing ideas drawn from marketing funds across multiple strategies. This may result in meetings between GPs and LPs neither of whom were previoulsly on eachother's radar.

"My role in marketing a mega buyout fund to a large sovereign is of little value. Where I can be helpful is in introducing to them opportunities in agriculture, hard assets, infrastructure, and credit - strategies that are less pervasive in an LP's portfolio and where the marketing process is less efficient," says Enrique Cuan, managing partner at Mercury Capital Advisors.

But he admits that the universe of institutional quality LPs is finite and appetite for non-Asian products in Asia is limited, with many of the larger LPs already running offices in Europe and the US. It brings the debate back to how placement agents can expand their target markets for distribution.

Ark's Furuya argues that a local presence is essential when addressing the Japanese market, not only to surmount culture and language barriers, but also to show a commitment to the country and its investors. He compares it to the emphasis Japanese LPs place on a GP having a local presence.

"I see a lot of foreign GPs with offices in Japan - they are not necessarily top quartile but they can still raise money because they have a presence here," he says. "If a placement agent just flies into Japan to spend a day or two after trips to South Korea and Hong Kong, investors ask if they have an office here, they say no, and it doesn't help."

Steve Kim, CEO of Seoul-based asset manager Castling Group, notes that the GP analogy no longer holds true for Korea. There is a realization that understanding the merits of a deal is more important than hearing it from a local, while placement agents have proved successful despite lacking a true domestic presence because they have a reputation for offering quality products.

The challenges are twofold. First, some Korean LPs still view placement agents as purely salesmen and are therefore more skeptical about the products they offer. Second, penetrating the lower tiers of the domestic LP universe might turn out to be more trouble than it is worth.

"Once you go into the second and third tiers, you have to think about regulatory issues and how to overcome language and cultural barriers. And the cost benefit isn't really there. You are adding all these barriers and bearing more costs but the level of potential commitments coming out of these institutions is lower," Kim says.

"If you don't have a dedicated focus and long-term commitment, you are almost wasting time and money so a lot of people don't bother to do it."

The majority of the leading global placement agents currently use Hong Kong or Singapore as a regional hub with no more than three sub-offices, usually covering the more developed institutional investor markets of Australia and Japan. These can be supplemented through well-established relationships with local players, while bank-owned agents are able to utilize distribution channels held by other divisions.

At present, only Eaton Partners has an office in Shanghai and the open question is whether others will follow suit, driven by the expected flow of capital from Chinese insurance companies as they begin to build out PE programs. Several industry participants express a desire to add to language skills as they add to headcount, but this doesn't necessarily mean putting a person in every market.

Mounir Guen, CEO of MVision, which claims to have the largest team in the region with 10 people in Hong Kong and two in Sydney, questions why such an arrangement is necessary at this stage. He advocates strong centralized teams within each region, passing on coverage to one another over the course of a day.

There is also skepticism as to whether markets in Southeast Asia or even Korea will ever be deep enough to make a dedicated private equity team member cost effective. Movsoumov of UBS adds the caveat that it is not just a question of having feet on the ground, but feet that are able to get in the door.

"If you really want to make an impact in certain LP markets like Korea, it's very helpful to be able to have a senior dialogue," he says. "You need to have senior people talking to senior decision makers. Building up a track record of obtaining commitments from these LPs is also important as it gives LPs higher degree of comfort with that placement agent. It is not enough having someone who knows the right number to call - that's becoming a commodity."

Beyond borders

Various evolutionary scenarios are plotted, with regulatory headwinds and client demand equally in mind.

One prediction volunteered by two different GPs is that there will be more tie-ups between global and local players, with the local partner offering cultural affinity, language skills and the physical presence that regulators may increasingly require for private placement exemptions. Several agents are wary of such arrangements, noting that they like it when partners defer completely to their processes.

Change, when it comes, will be in line with market demand and this shouldn't be seen in purely geographical terms.

Both the GP and LP communities in Asia have bifurcated in recent years, the gap widening between the very large and the rest to the point that they are playing a very different game. While the large GPs are becoming more customer-focused, providing tailored solutions, the middle-market players - and by extension the placement agents - are operating in much the same way as before.

Rather than be disenfranchised by the larger end of the market, placement agents are expected to carve a niche in it, offering joint ventures, co-investments or anything that presents direct deal flow to an institution that no longer favors the co-mingled pool approach. The business model might be the same - putting the right product in front of the right person, and small and mid-market GPs will remain part of this process - but the methods of engagement will multiply.

"The objective is to get the right exposure and it is hard work. Nobody is getting paid for a conference call any more, but for real chunks of volume that require global manpower," says Hamilton Lane's Delgado-Moreira. "The days when a placement agent made rain by introducing a GP to a sovereign wealth fund in Brunei are long gone."

 

SIDEBAR: Long arm of the law

Kuwait-based National Industries Group (NIG) lost $25 million when a mortgage-backed securities fund run by The Carlyle Group went bust in 2008 when the sub-prime mortgage market exploded. Feeling it hadn't been fully briefed on the risks, NIG took legal action.

However, it sought to have the case heard in Kuwait rather than Delaware - as per the investment agreement - arguing that the agreement was void because Carlyle was not licensed by local regulators to market its products in Kuwait. Carlyle then sued NIC in Delaware over its refusal to comply with the agreement and, as of May 2013, a Delaware court ruled that the case could he heard locally.

The situation amounts to an instructive lesson in the risks presented by local licensing regimes for marketing PE funds should a GP not do its homework.

Asia is a mixed bag when it comes to granting PE firms the private placement exemptions required to approach qualified investors without making onerous public disclosures.

Most markets in the region have individual licensing systems and anecdotal evidence suggests that some placements agents have broken the rules at some point, either ignoring cumbersome legislation or inadvertently treading on the wrong side of a very gray line. However, regulatory regimes are strengthening and agents must pay closer attention to compliance.

"Achieving the appropriate licensing and regulatory compliance in Asia can require significant expenditures on legal advice from local counsel," says Robert Mast, managing director at Monument Group, which recently opened offices in Hong Kong and Tokyo.

There are several markets in which the rules are clear. Hong Kong, Singapore and South Korea all require placement agents or distributors to hold a securities broking license and maintain a local presence. In Korea there is likely the added burden of registering a fund, which takes a number of weeks. In Japan a license is required and a licensed local representative must attend all LP meetings with GPs and send formal marketing materials.

Elsewhere the regulations are non-existent or outdated, with plenty of detail on public equities marketing but little or no guidelines as to how to qualify for a private placement exemption. Malaysia is perhaps the extreme example, with industry participants saying the solution is to hold meetings in another country. Reverse solicitation is another workaround in certain jurisdictions.

"I expect that with time, once there is a critical mass of interested parties of LPs and fund managers, they can give guidance to regulators to pass more appropriate legislation on private placements," says Javad Movsoumov, executive director of UBS' private funds group in Asia Pacific.

In the meantime, agents that are part of banks can leverage their parent groups' broader distribution channels while industry participants of all kinds work with local partners. For many, particularly in markets like Korea, local partners are a necessity, although sometimes a painful one.

"Placement agents must work with other local agents they don't have longstanding relationships with for the sake of the law, and often times each party's role is not clearly defined. From a working-relationship standpoint, this can create some challenges," says Steve Kim, CEO of Seoul-based investment manager Castling Capital.

"Also, a lot of the time, the domestic agents feel they should be more involved in the sales process, but the international agent may not; and vice versa."

 

 

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• Topics
• Fundraising
• North Asia
• Greater China
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• Fund-of-funds
• Japan
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• Hamilton Lane
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• MVision
• UBS