Frenemies

On the issue of who to call when you raise your next fund, there are arguments that a savvy in-house investor relations executive negates the need for a placement agent. Others would suggest that placement agents are more valuable because of their bird's eye view of the LP community and access to new investors. Today's industry boom affords many GPs the luxury of both, but with that comes the responsibility of managing the relationship between the agent and the IR executive.

Both placement agents and IR executives define their roles expansively enough to court redundancies with each other. Given that they're judged by the quality of the firm's interaction with LPs, both tout close relationships with investors. When the quality of those interactions is put to the test during fundraising, there can be competition over who is responsible for which investor, not to mention subsequent commitments. This friction can easily hinder fundraising by complicating the process with political maneuvering. One way to alleviate the tension is by clearly defining responsibilities between the two. This involves drilling down to such tasks as data gathering, drafting marketing materials, even scheduling meetings, and assigning the responsibility to either the agent or the IR executive. With distinct boundaries, the agent and the IR executive can collaborate more effectively, free from concerns about their relevancy to the partners.

Equally valuable
Few, if any, placement agents or IR executives argue that firms should rely on them exclusively. Naturally, however, there can be disagreements about the utility of placement agents versus investor relations professionals depending on which side of the fence you're on.

?Look, the agent brings substantial market intelligence to the table,? says Jim Rutherfurd, the managing director of marketing and investor relations at the New York-based private equity fund Veronis Suhler Stevenson.

Terry Crikelair, managing partner of Greenwich, Connecticutbased placement agent Champlain Advisors says, ?It's a tremendous asset to have someone at the firm dedicated to reporting and fundraising. We view them as a resource for helping to provide data in a timely fashion to various LP requests.?

Many placement agents noted the expertise of IR staffs in speaking the same language as investors and suggesting the right partner to address a LP's question. The agents applaud the marketing efforts of the in-house staff between fundraisings, but as Crikelair adds, ?Agents can add depth and breadth to the institutional branding.?

One private equity IR executive tips his hat to an agent's ability to bring in new investors, specifically LPs from new geographies, but stopped short of crediting them for investors returning for second and third commitments. The executive explains that a strong track record properly reported to an LP makes the most compelling fundraising pitch.

However, argues Mounir Guen, of London-based placement agent MVision, ?Existing LPs act like new ones when fundraising launches.?

Some agents suggest that as full-fledged employees of the firm, IR staff's relationships with current LPs can have blind spots. ?LPs often won't be as frank with these professionals as they're viewed as part of the firm. Our independence grants us a different, and in some cases, more open relationship regarding a GP,? says Kelly DePonte of San Francisco-based Probitas Partners.

Veronis Suhler's Rutherfurd finds the opposite to be the case. ?I find some LPs more willing to speak to us, as members of the firm, about our strategy and the current state of our portfolio.?

An IR staff's ability to process the firm's internal data for fundraising is also up for debate. ?Some of these staffs are stretched thin trying to tackle the separate processes and demands of as many as 250 different investors. Add to that a request for 150 specific data points a day from potential LPs, by the day's end, and it is a lot for them to handle. You can't ignore the fact that they face a substantial administrative burden even before fundraising starts,? explains Guen.

One investor relations director admitted that workload can play a factor, but an efficient reporting process lends itself to pinpointing data points easily. He stressed that valuable time can be lost when staffers need to explain to agents how to download data instead of snagging the statistics themselves.

Rutherfurd explains that IR staff members can actually speed the process up: ?Agents can do the initial outreach, but you can waste the senior deal team's time with introductory meetings if you don't have the IR team doing that constant outreach.?

Something to prove
That placement agents and IR professionals might step on each others' toes is only natural, given that both sides are essentially intermediaries, and intermediaries define their value as a function of access. Therefore, without clearly defined duties in a fundraising, squabbles can break out over the intangible issue of relationships. This is amplified by the fact that agents are paid for cementing relationships that may already have been forged to some extent by in-house staff. ?I think some intermediaries believe they'll be marginalized,? says David Berchenbriter of New York-based placement agent BerchWood Partners.

Agents may have a fundraising target, but questions can linger as to how much of the funds raised were due to their prowess, and how much was due to the slew of exits from the current fund. Investor relations professionals don't typically need to hit a fundraising target to demonstrate their worth.

An argument could be made that while agents and IR professionals disagree as to what exactly the other provides, the GPs employing both have their bases covered. What if the LP is more open with agents than the director of IR? With both on the payroll, that constructive criticism is going to be captured.

The relationship between agents and IR executives echoes those pirate tales where opposing parties have to work together because each has only one half of the map to the buried treasure. If the placement agent and IR staff pool their resources, a straight line can be traced to the fund's close. If not, each is employing a lot of guesswork on the way there.

?If the IR staff believes that certain limited partners are ?their relationships? they can be tight-lipped about those investors' preferences. We try and build momentum with an early close of current LP commitments, and that reticence can sometimes slow our drive down,? says DePonte.

?You've got to respect current relationships,? adds Berchenbriter.

A cautionary tale
One case in particular highlights the perils of leaving the agent and the IR staff with room to tussle.

A veteran buyout firm was raising a vehicle several times the size of its previous one. In several instances, failure to coordinate between the placement agent and the IR staff produced embarrassing results, particularly for the GPs.

One incident involved failure to coordinate on prepping the GPs for meetings. The IR staff had begun its own contact database that would combine investor details from the placement agent with its own research, which included any relatively recent press coverage of the LP. Upon confirmation of a meeting with an LP, the IR staff would print out the relevant database entry, complete with the press clippings, for the GP to review.

The placement agent was aware of these briefings, but didn't collaborate on their production, which didn't seem a problem until too late. In a meeting, one GP made mention of a quote from a particular press clipping, not realizing it was made by someone who recently left the LP under less than favorable terms. The placement agent, immediately realizing the mistake, had been unaware of what materials the GP had been provided. The meeting rolled on after the faux pas but with considerably less warmth in the room.

Scheduling triangulation occurred. The placement agents would often call the IR staff to coordinate with the partner's administrative assistant, but sometimes the agent would call the assistants directly to save time. This led to the IR staff, unaware of these other meetings, double-booking partners on several occasions. With multiple parties editing the calendar, it was rare that anyone could trust the itinerary on their computer.

The agent soon offloaded an increasing share of the workload to the IR staff. Rather than argue over the content of the marketing materials with the IR director, they conceded major points to them, but left the in-house staff to draft and generate the materials. As the fundraising slowed before the target was reached, the placement agents pulled back their level of involvement even further. To their credit, the IR staff pressed onward, cobbling smaller commitments together to cross the finish line.

The confused interaction of this unwinding relationship took its toll. A co-investment letter was faxed out to LPs with typos; additional staff was hired to pull off the annual meeting.

Aligning the relationship
This cautionary tale involved no bad intentions and substantial time and effort. However, the lack of communication allowed mistakes to snowball into a perception that the fundraising process was coming off the rails. This begs the question: What is the best way to avoid their relationship fraying when it matters the most? ?It's all about alignment,? says Crikelair. ?Everyone needs the proper incentives to work together.?

For the agent, there is traditionally a difference between fees for funds raised from current LPs and those from new LPs. However, the GP can install bonuses to be paid to the agent if the agent's LPs go on to invest in subsequent funds. In this way, agents can continue to reap rewards for subsequent commitments. This can diffuse the debate over what constitutes a new investor, as institutions may have committed capital to the last fund but have also hired new investment officers the need to be wooed.

Given the links between their compensation and the closing of the fund, agents are already motivated to do whatever takes to reach the target. For the IR staff, it may be more complicated than that. An agent's extensive time with new and current LPs may stress the administrative angle of the IR function, rather than its strategic role.

That's usually when the IR counsel begins injecting themselves into the process, not as a collaborator but as a competitor.

Providing a meaningful bonus to the IR counsel for the successful close of a fund could realign their interests. This bonus ties the IR staff to the success of the entire fund, and removes the burden of proving their relevancy to the firm.

Data, marketing, logistics
With the agent and the IR counsel no longer squabbling over who owns what investor, how do they proceed? The answer is with great care and few assumptions. There should be little room for interpretation of who's responsible for what fundraising tasks. The IR staff should hammer out the working relationship with the agent before any contracts are signed, though such details don't need to appear in the fine print of the agreement. The tasks to address should include data gathering, marketing materials and logistics.

For data gathering, it is crucial to define what exactly agents expect from the IR staff in terms of providing information. Does the agent provide a list of requested data points to be searched and calculated by the IR staff, or does the agent do the calculations? Is there an initial, comprehensive download of financial data from the IR staff that's then managed by the agent throughout the fundraising process? One agent recommended a single person on the IR staff to manage data flow to the agent as that individual will tend to develop a proficiency in knowing what's available and how to package it.

Producing the marketing materials will always have the potential to grate whatever political sensitivities there may be. In black, white or rainbow colors, the sales pitch to investors is articulated, reflecting the priorities and tone of the drive itself. The partners collaborate extensively on these, but the agents and IR staff should agree on who is responsible for the first draft and how to settle differences in opinion on content. Some IR personnel are happy to excuse themselves of the process entirely, outside of random data inquiries.

Finally, there's the scheduling question. ?Logistics will always be a hurdle,? says DePonte. However, a common theme is that scheduling snafus suffer from too many people entering appointments. The more centralized the meeting calendar is, the less chance for double booking.

A single calendar with one administrator should be created, listing only fundraising meetings and major conflicts, such as monthly partner meetings or other firm-wide commitments. The partner's own assistant can track their host of other time commitments, but all parties, whether they be the agent, IR staff or even the partner, should schedule LP meetings through that one person. That person may be at the placement agent, or inside the firm, but they should be identified as early as possible.

With interests aligned and responsibilities spelled out, the agents and IR staff can now share their intelligence on LPs. They can comb through lists of current investors and targets, one by one, to compare notes and draw conclusions that will eventually be presented to the partners. Certainly contact details should be verified, but this is the time for both to discuss what an LP might have said regarding the current fund, and impressions of the future commitments.

?It's a two-way street,? says Berchenbriter. ?The IR team keeps us up to date with regards to our client, and we provide perspective on current and potential LPs. Over time, it can become a real collaboration, and we become an extension of the IR program. We end up advising on the nitty gritty details of reporting, such as LP mailings.?

If agents and IR counsel no longer view each other as competitors, both feel free to tap their collective IQ on the firm's behalf. However cultivating trust between them requires drawing a line between the two, so neither can claim too much credit nor too much blame.

Fee factors
It may not be the size of the fund, but the style of the fundraising that most influences how a placement agent constructs its fees. A placement agent's compensation remains largely in the form of the success fee, those few percentage points of the total funds it raises. With the rise of the multi-billion dollar funds, the standard range of one to three percent is untenable for GPs to pay, as the fees are paid by the sponsor, not the investor. Yet, falling well below one percent on these giant vehicles can still set new records in fees. Beyond the sheer size of the funds, the maturity of today's private equity players is prompting agents to use complex formulas to determine their compensation.

Those formulas include several factors beyond the size of the fund. First-time funds can prove the biggest gambles, demanding the workload of building an LP base from scratch, coupled with meager financial resources. The mature fund presents its own set of challenges, with firms arguing the value of funds raised among current LPs, opposed to those raised from new parties. The veteran firm may further complicate matters by employing multiple agents with narrow mandates, leaving agents competing for the time of senior deal teams for smaller pools of capital. All these factors are considered by the agent, with the resulting fees a complex blend of evidence and expectations.

First-time funds are naturally short on evidence and long on expectations. Even if the partners come with long track records at top-tier shops, they may have little experience with the pace and demands of first-time fundraising. Marketing materials have to be drafted from scratch. LPs will be skeptical and their doubts can spell multiple meetings for even meager commitments. ?You have to expect these first time drives are going to be intense,? says Kelly DePonte of San Francisco-based placement agent Probitas Partners.

?The range tends to remain between one and three percentage points, though tempered by an awareness of the GPs' capacity. No agent wants to jeopardize the firm's launch with exorbitant fees,? says Shukia Grossman, a fund formation attorney with New Yorkbased Weil, Gotshal & Manges. Some firms that execute many firsttime fundraisings, like Probitas, will roll a portion of their fee back into the fund to become a limited partner for the firm. ?It reflects our faith in the groups we raise funds for, and keeps us involved,? says DePonte.

While first-time funds may welcome that commitment, some veteran firms are narrowing the mandates for agents. Some negotiate a two-tier structure: one for current LPs, and one for new LPs. In some cases the success fee only pertains to funds raised by new LPs. ?Differentiating between current LPs and new LPs can be a tricky proposition. If a fund appears on its way to be overcommitted, why take on LPs you have to pay a success fee on?? asks David Berchenbriter of New York-based placement agent BerchWood Partners. Some agents offer a multi-tiered approach based on previous funds. DePonte explains, ?In certain cases, two percent may be charged on monies raised up to the size of the last vehicle, with 2.5 percent charged for everything beyond that level.? This might be an increasingly common option as firms survey the current climate and aim for a fund triple the size of their last one.

Some firms narrow the mandate geographically, employing multiple agents to cover the globe. ?This can cause friction among agents as they compete for partners' time at the LP meetings they set up,? explains Berchenbriter. These narrow mandates will often maintain the one to three percent fee, both for the trouble and the smaller tallies. The percentages drop, however, when agents receive global mandates and traditional percentages will translate to punitively high costs.

Beyond these factors, placement agent costs remain the traditional mix of expenses for travel and marketing materials, monthly retainer fees deducted from the success fee, and the success fee itself. The fact that the fee is no longer simply a straight percentage reflects of the increasing diversity of the asset class and the complexity of raising funds, even during the current boom.