The cost of commitments

No one could deny today’s fundraising trail is more brutal relative to just five years ago – one consequence of which has been the increased use of placement agent services and more budgeting for fundraising. 

Indeed for all GPs, regardless if a placement agent is used, budgets should consider the “cost of a commitment” today. LPs are sending GPs more questionnaires before investing, many of which require detailed responses. Data rooms may also need to be incorporated into GPs’ IT platforms to provide LPs easy access to firm data. And once GPs hit the road, they’ll find that a commitment normally requiring one or two meetings in 2007, will now take three or four meetings. As a result, the travel budget needs to be expanded, making that third or fourth firm handshake come at the cost of another plane ticket.

As mentioned, the use of placement agents is another solution more GPs are now reaching in response to tougher fundraising conditions. GPs are using placement agents in the creation of their marketing materials; serving as strategic advisors; ensuring GPs terms are within market norms; and at their most fundamental function: introducing GPs to investors worldwide.  

For GPs that had only considered using a placement agent during the industry’s golden period, it would be wise to know that the costs and benefits of placement agents today have amplified post-crisis. And because it’s harder work to raise a fund these days, naturally placement agents are charging more, and more of them are charging retainers or up-front fees.

FEE-FI-FO-FUNDRAISING 

Retainer fees are in fact now a common feature in the industry; sources say they are used to cover placement agents’ pre-marketing and marketing expenses. “Retainers cover the costs of prep work for clients both before and during formal fundraising and they vary depending upon the level of service provided and whether a mandate is global or targeted,” explains Antoine Drean, founder of placement agent Triago. 

Some GPs  however prefer an upfront signing fee as an alternative to a retainer, something typically in the six-figure range. Everything, however, is up for negotiation, sources say, but a good starting point is something in the $20,000 to $50,000 range when considering a monthly retainer charge.

Typically monthly payments are offset against agents’ success fees – measured by percentage points of total cash raised by the agent. Further changes relate to how placement agents take their cut of funds raised. Previously, a GP might negotiate a carve-out or a carve-down for capital committed by an existing LP. The idea was that because the relationship was already strong, little work needed to be done to convince an existing LP to re-up, so the placement agent wouldn’t receive the standard 2 percent of the capital commitment. The placement agent instead would receive maybe 1 percent, or even nothing.

But that practice is changing, because re-ups are no longer a given. A placement agent will either negotiate no carve-outs, or charge a “blended” rate of less than 2 percent that covers the entire LP base, existing and new. 

CHALLENGING FUNDRAISING CONDITIONS 

Moreover placement agents are now being hired earlier and earlier in the fundraising process, meaning yet another cost to consider when launching the next fund. 

Historically, placement agents were hired to begin the wooing process in the immediate months prior to a GP’s next fundraise, says Kanika Kumar of placement agent Acanthus Advisers. In today’s fundraising environment, that would be considered late in the process. Kumar explains that investors now want more time to review fund managers’ performance, team, internal controls and overall risk/reward profile – and so a few months may not be enough of a window for investors to feel comfortable enough that their due diligence has been completed. 

“LPs appreciate being contacted before formal fundraising begins. They want to develop a strong relationship with a manager, and that can’t be done if they’re feeling rushed to make a commitment,” Kumar elaborates. She advises GPs to think about concerted investor outreach early, at least from when the current fund is 50 percent invested. 

And for existing relationships upon which the GP depends for re-ups, the “fundraising mentality” should never end, says Mounir Guen, head of placement agent MVision Private Equity Advisers. “Existing LPs are applying a higher level of rigour than new ones, as they are more aware of how a GP treats LPs when fundraising isn’t front and centre on their mind.”

These fundraising trends of course mean greater overall work for placement agents, hence the increased costs. “You have this situation where a typical mandate may now last two years; so an entire year of just laying the foundation before a year of actual fundraising,” says Kumar.