News analysis: Placement agent identity theft

What is a placement agent? Ask any member of the private equity community this question, and they’ll likely describe a person who acts as a representative of a private fund manager in securing capital for an investment vehicle, and a person who gets paid based largely on the success of the fundraising effort.

But the board of CalPERS believes that placement agents so defined have no proper role with public pensions. Instead placement agents should be defined and regulated as lobbyists, the board members announced today.

In the meantime, Securities and Exchange Commission is pondering an entirely different redefinition of placement agents. It sees them as “solicitors” similar to those defined (and banned) by the municipal bond regulatory regime, MSRB Rule G-38.

These two attempts at redefinition amount to identity theft in the minds of placement agents and those in GP and LP camps who rely on their services. The sad truth is, a clutch of unregistered influence peddlers have been identified by rulemakers as “placement agents” and, so defined, the rulemakers want “placement agents” to change their stripes.

In California, state controller John Chiang today supported the CalPERS decision by offering this analysis: “There is little difference between an individual hired to sway the investment of public funds in a specific company and a lobbyist hired to influence a legislative or administrative decision under the Capitol dome.”

As registered lobbyists, fundraisers would need to follow a raft of rules, including a prohibition on accepting “any payment in any way contingent upon the defeat, enactment or outcome of any proposed legislative or administrative action”, according to California’s Political Reform Act of 2007, which governs lobbyists. In other words, a placement agent who attempts to secure a commitment from, say, CalPERS, for a GP would be paid a flat fee regardless of the outcome. We're guessing that not many placement agents are going to be signing up for this gig, but some existing lobbying groups might like the opportunity to expand their offerings. (Does California really want lobbying firms to now sell private funds to the state pensions? Just asking.)

A potentially more damaging case of identity theft is being perpetrated at the SEC, which has proposed a rule to govern placement agents using a framework lifted from the muni bond world. As powerfully illustrated by a comment letter submitted by Credit Suisse’s John Robertshaw, the commission is equating placement agents in the private fund/public pension relationship with banned “solicitors” in the muni issuer/bond buyer relationship.

Here’s where it gets tricky. The controlling factor in both the muni world and the private fund world is interaction with a municipal entity. But in the muni world the issuer is the public entity, whereas in the private fund world the investor is the public entity. But in the muni world, there stands between issuer and investor a registered and highly regulated broker dealer. On the private fund side, there stands between the private issuer and public investor, for now, an unregulated swarm of middlemen. The SEC is seeking to ban all of these actors. But Robertshaw has proposed an elegant alternative – subject these middlemen to the same level of oversight and registration as exists in the muni market. Ban the solicitors, but keep and regulate the broker-dealer placement agents, who after all provide a useful service.

Whether this re-re-definition of the placement agent captures the imagination of the SEC remains to be seen. The travails of placement agents are a lesson for the broader private fund market – that being, unless you band together to vigorously and compellingly tell your story, others will tell it for you, and you will be regulated according to this unauthorised biography.