Study: Use of placement agents drops below 50%

Research by Swiss group, SCM Strategic Capital Management, suggests placement agents decided not to work for certain firms last year in the belief that their fundraising efforts would flounder

The use of placement agents in raising real estate funds in 2009 dropped below the 50 percent mark, according to exclusive research.

Swiss group SCM Strategic Capital Management, which analysed 81 direct closed-ended offerings last year, said while in the past managers used a placement agent in slightly more than half of all fundraisings, the percentage had actually dropped below 50 percent in 2009.

In the research, called 2009 – Annual Review of Private Equity Real Estate Terms and Conditions, the firm concluded that the fall-off in using third party capital raisers was not to do with fewer fund managers engaging such firms. Rather, it suggested, it was placement agents declining to take on mandates.

SCM said it may come as a “surprise” that placement agents were used is less than 50 percent of cases given the “difficult fundraising market” and that one would have expected managers to “flee into the arms” of capital raisers. However, it suggested: “SCM believes that this development is less to a result of fewer managers trying to engage placement agents but rather the placement agents’ decision not to accept mandates, which in their view will never come to a successful end.”

The research goes on to explain that for this reason, placement agents changed their model from a “pure success” fee to a mix of retainer and success fee. “While such a model improves the placement agents’ position, managers will probably be more reluctant to award mandates to placement agents where the fundraising success and duration seems questionable,” it said.