Placement agent?
Ignore title. Pivoted to RE in a niche sector to run finance for a management/ development company. We are bullish on our sector despite the environment and, given our typical deal-by-deal institutional investors are pencils down on any development, are considering raising a $100mm fund.
We have access to several family office opportunities, but would rather focus on what we are good at rather than fundraising. That has led me to placement agents. Can anyone with knowledge provide a breakdown of how this engagement might go? Most interested in:
1) likelihood of engagement: how exclusive are these shops? Are they likely to engage with an emerging fund with no track record but a compelling value prop?
2) what is their chance of success? How often do they fail in raising the target ($100mm in this case)?
3) fees: I understand 1-3% of funds raised is typical and that makes sense / seems fair. Is there also a fixed fee component? Not ideal to be paying a firm with no fee revenue and no guarantee of success
Any other relevant insight would be much appreciated
Based on the most helpful WSO content, let's dive into your queries about engaging with placement agents for your fund-raising efforts, especially considering your pivot to Real Estate in a niche sector and the aim to raise a $100mm fund.
1) Likelihood of Engagement with Emerging Funds: - Placement agents can vary in their willingness to engage with emerging funds. Top-tier placement agents often seek established funds with a strong track record because it's easier to market these to their network of institutional investors. However, that doesn't mean emerging funds with no track record but a compelling value proposition are out of luck. There are placement agents who specialize in or are open to working with emerging managers. The key is your value proposition and the uniqueness of your strategy in the current market. Your access to several family office opportunities can also be an attractive point. The likelihood of engagement will significantly depend on how well you can sell your fund's potential to the placement agent.
2) Chance of Success in Raising the Target Amount: - Success rates can vary widely and are influenced by many factors, including the economic environment, the specific niche of Real Estate you're targeting, and the strength of your value proposition. While there's no specific data on failure rates, it's known that raising a fund is a challenging process, and not all efforts meet their target. However, a well-connected placement agent with a strong salesforce and a good track record can significantly increase your chances. Remember, the success of raising $100mm will also depend on the current appetite of investors for your niche sector and the overall market conditions.
3) Fees Structure: - The typical fee structure for placement agents indeed ranges from 1-3% of the funds raised. This is considered the success fee. Regarding a fixed fee component, it varies between agents. Some may charge a retainer or upfront fee, especially if they anticipate a lot of upfront work to prepare your fund for the market. This could include developing marketing materials, organizing your data room, and getting your due diligence questionnaire in shape. However, not all placement agents charge such fees, and it's often a point of negotiation. It's crucial to discuss and understand all potential fees before engaging with a placement agent to avoid surprises.
Additional Insight: - It's essential to select a placement agent who not only believes in your fund's potential but also has the right connections with investors who have an appetite for your specific niche. A good placement agent does more than just introduce you to potential investors; they guide you through the fundraising process, provide market insights, and help position your fund attractively.
Consider the alignment of interests. Some placement agents might be more motivated if there's a success-fee-only arrangement, but this could also mean they're selective about the funds they take on.
Lastly, the relationship with a placement agent should be seen as a partnership. Their success in raising funds for you will depend on the quality of the collaboration and the information and access you provide them to sell your fund effectively.
Remember, while the process can be daunting, the right placement agent can be a valuable ally in achieving your fundraising goals.
Sources: Q&A: Fundraising for Private Equity, Cap Intro & Investor Relations Career Paths, Q&A: Hedge Fund Allocator at a $2B+ E&F, Q&A: Fundraising for Private Equity, Cap Intro & Investor Relations Career Paths, Q&A: BlueWing Part 2: Endowments, Foundations, & Asset Allocators, Q&A: Hedge Fund Allocator at a $2B+ E&F
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Limited but some experience on this:
1) I’m not in RE so may be different. Outside in, RE seems to have more prospective LPs than PE where pensions etc are relatively big share of capital vs. more family office / individuals in RE. To answer directly - not exclusive on relationships and you’ll be able to find one as a new fund but they will likely also be unproven. Some of the new placement agents we evaled had backgrounds that made sense wrt to connections they’d bring but you have to worry a bit on operating experience.
2) can’t opine, we’ll see
3) usually a monthly retainer during fundraise that will be an outflow. It’s typically fully offset / credited back later against the success fee. You can negotiate the timing of success fee payments to better align to your management fees to limit the cash but they’ll want some portion of it upfront.
Thank you, this is helpful. When you say operating experience, what does this refer to in the context of placement agents?
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