Facing tough market conditions that favor established
managers, should GPs retain placement agents?
Key takeaways
• 84.8% of capital raised through Q3 2022 went toward experienced managers,
leaving first-time and emerging managers in a difficult fundraising position; certain
GPs, therefore, may want to consider placement agents as a fundraising resource.
• While placement agents are commonly thought of as introduction services, this
is only one component of their scope of work: Placement agents assist the GP
through each stage of fundraising, from document preparation, data room set-up,
relationship management, setting up meetings and aiding LPs to the final close of
the fund.
• Placement agents cover funds of all sizes and strategies. Broadly speaking,
placement agents fall into one of three categories: large-scale, boutique, and
specialized, smaller firms.
• Of the 2,760 funds that closed through Q4 2022, 344—approximately 12.5%—used
a placement agent to aid in their fundraising.
• In 2017, the average time to close for the 434 funds working with a placement
agent was 15.4 months, versus the 26.4-month average of the 4,880 funds that
did not work with agents. Since the pandemic, however, funds that work with
placement agents spend more time on average in market than those without them:
In 2021, the 698 funds retaining agents took 18.6 months to close, versus just 16.6
months for the 4,575 funds that did not.
Introduction
The fundraising environment is expected to be difficult in 2023. Private markets
are still facing the numerous challenges that arose in 2022 and have persisted
into the new year. Rising interest rates have struck one of the main mechanisms
for generating returns—the leveraged buyout—at a time when the IPO market, a
crucial exit mechanism, is still seized. The denominator effect has forced LPs to
reconcile their private market-heavy portfolios, leading LPs to not only suspend
making commitments to managers they have not worked with previously, but to
also curb commitments to existing managers. In some cases, LPs are even selling
portions of their private market portfolios on the secondary market to decrease
their private market exposure or free up some liquidity, but these trades are often
being done at a steep discount, given the disconnect between GP NAVs and the drop
in public markets.
These unfavorable conditions make it imperative for fund managers coming to
market in 2023 to be thoroughly and aggressively prepared for all aspects of the
LP due diligence processes.1 GPs are seeking capital in a market in which capital is
scarce, and thus must make an incredibly cohesive, compelling case for why an LP
should invest in their fund, despite extreme market volatility and risk. Most capital
raised has trended toward established managers: Approximately 70.9% of capital
went to experienced managers between 2011 and 2021—and the percentage has
increased in recent years. Private capital fundraising totaled $926.4 billion through
Q3 2022, but $785.9 billion of that figure—84.8%—went to 959 experienced
managers, while the remaining $140.6 billion went to 888 emerging firms.2 This
makes the playing field incredibly difficult for emerging managers, especially
those without a brand name. Given these unique challenges, it may do GPs well to
consider retaining the services of a placement agent to aid them in their fundraising
processes—particularly first-time or emerging managers, or managers that are
looking to raise capital from a certain LP category or geography.
What are placement agents?
Placement agents are hired to efficiently identify LPs who are most likely to invest
with their client—the GP—and to assist the GP through the fundraising process.
Agents aim to facilitate a smooth, quick fundraising process for the GPs that they
represent. While placement agents are often thought of as introduction services,
that is only one component of their services. Agents assist the GP through each
stage of fundraising—from preparing documents, setting up the data room,
managing relationships, arranging meetings, and aiding LPs to the final close
of the fund.