Primer on the Private Equity Agency Business
Mod Note: This was written by Terri Tierney Clark, one of the first female Managing Directors in the Investment Banking Division at Merrill Lynch.
Primer on the Private Equity Agency Business
There was sort of a manhood issue regarding fundraising in the late '70's and early '80's when private equity investors like Kohlberg, Kravis and Roberts came together to form blind pool limited partnership vehicles. They would call on past equity investors from their direct deals and shun assistance from Wall Street. But as the number of private equity shops expanded, principals began to worry about the demand for institutional funds.
That's when these firms began to look to Wall Street for help. In 1989, after Merrill Lynch raised Thomas H. Lee's first half billion dollar fund, the bank refocused its private placement group to capitalize on the growing demand from private equity firms. Merrill was the only game in town briefly; then other banks saw the opportunity and began developing competing agency businesses. Boutiques also started to appear, offering private fund placement services.
Private equity agency businesses have multiplied since the late 80's so that now finance professionals can develop careers solely within the industry. Here's a quick view of how the business works:
How is the Business Structured?
At investment banks, the group often consists of origination professionals who have primary responsibility for the private equity client relationship, and marketing professionals who have primary responsibility for the institutional investor client relationship. The entire team is generally housed within the investment banking division of a firm. The origination banker may cover only specific specialties, such as leveraged buyouts, Asian private equity, real estate, or mezzanine funds. The marketing professionals are often specialized by geographic region, i.e., the southeast U.S. or Western Europe. Large agency businesses have dedicated marketing coverage globally and some also have dedicated origination professionals abroad. Others rely on relationship managers in foreign offices to refer deals back to the U.S. based origination team.
Role of the Professional?
Private equity agency business may be referred from another part of the firm or it could be developed from relationships within the private equity group. Most often the team will have to pitch for the business which involves both origination and marketing professionals meeting with the equity firm's principals. These principals know they will be joined at the hip with their bankers for six to nine months so their decision can be a drawn-out process. A bank might need to meet with an equity firm five or six times before it wins the business.
The origination bankers advise their clients on the market and help them develop the best structure for the limited partnership interests being offered. They also perform due diligence on the client's past company investments and exits. The financial information is generally non-public and requires reconstructing cash flows to reflect a firm-wide internal rate of return. The bankers also work with the client to develop a private placement memorandum and a presentation for the one-on-one meetings with institutional investors. Unlike public offerings, limited partnership interest sales require the private equity client to meet directly, often several times, with every institutional buyer. This roadshow, put together by the origination team and marketing team, and often attended by representatives from both teams, along with the client, will last several months. Also different from public offerings, in a limited partnership offering, everything is negotiable. The bankers help negotiate partnership terms between the equity firm and the investors. That process can last several weeks.
Whereas the origination professionals represent a few of their group's equity firm clients at a time, the marketing professionals are responsible for representing all of the group's equity firm clients to their specific institutional investor clients. They spend time developing relationships with the investors who include: public pension funds, corporate pension funds, universities, family trusts, insurance companies and banks. As the partnership interests are negotiable, getting to the final sale of interests can take months of follow-up by the marketing banker working closely with the origination banker and the private equity client in discussions with their investor client. Most large investment houses use a proprietary private equity marketing team but might bring public account representatives into a deal if the reps have clients who would be interested in investing in private partnerships.
What is the Career Path?
Fortunately for private equity agency professionals, equity firms will always need to raise money; and the trend of using agents has never reversed. Agency bankers can rise in the ranks from analyst to managing director. And like bankers in other areas of investment banking, firm jumping has been popular too, especially as new groups have developed across Wall Street. Another option for bankers from private equity agency groups is ultimately moving directly to a private equity shop. These shops hire former agency bankers to either assist them directly in their fund raising efforts or to manage their investor relations departments.
The agency business is a profitable niche for some Wall Street firms and a viable career path for finance professionals. The upside of the business is significant interaction with leaders in the private equity world (although not the training to switch over to a career as a private equity investor). The downside for some may be the duration of a transaction until closing. At several months to a year, the agency business requires a very patient banker.
Terri Tierney Clark edits a website called Advice for the New Careerist to help young professional's optimize their careers. She also manages an advisory business, Summit Equity Advisors which offers private equity-related services to financial services companies. Previously, Terri was one of the first female Managing Directors in the Investment Banking Division at Merrill Lynch, managed its Real Estate Private Equity Placement business and was elected to the firm's first Women's Steering Committee. Find her @TheNewCareerist.