Previously we were raising money through our private client list, but lately we been approached by several placement agents that like our portfolio and acquisition criteria. I know typically fees vary anywhere from 5%-7%. How are the fees structured? Some of them are asking for an upfront retention fee and they are relatively hefty. Is this normal? We don't want to throw money at them and they end up not being successful. Or is the norm that they just collect when they are successful? Anyone here have experience as a placement agent or worked with one? Thanks.
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Are you referring to raising capital for a fund, or for a single deal?
Single asset deal
If the OP is referring to asset specific, I have worked with an equity placement agent and in my experience, fees are typically around 200 bps of total equity raised. Depending on the pedigree of your shop, this fee can be greater or less.
The 1 deal I worked on like this we ended up securing our own capital, and because of this we did not owe anything to the shop (there was no upfront retainer). However, because real estate is such a relationship driven business, we ended up giving them a flat fee to cover their marketing expenses.
200 bps is pretty good. This is an asset specific deal. I guess in your case it makes sense since you raised the capital by yourself. I just wanted to get a sense of the norm here, if we have to pay an upfront retainer. I can certainly understand a reimbursement for their marketing efforts.
I'm going to assume it depends on the market for the asset. If someone is looking for capital for you on a hotel in albuquerque, 5-8% is probably fair. If its a MF in NYC it'll probably be closer to 1%.
But I know nothing about equity brokering, never had to use those guys.
Whats an example of an equity brokerage company? Who has someone used in this forum? Don't need specifics, just a couple of company names.
Mission Capital is good as well
@SHB Well said. My previous comment was my experience in NYC.
@cre123 The major brokerage shops all provide equity brokerage as part of their Capital Markets/"REIB" teams (think CBRE, JLL, C&W,DTZ, HFF). Ackman-Ziff is good in this space as well. There are always tons of boutique shops that provide equity brokerage advisory
I think you are confusing RE specific and a traditional IB capital raising engagement, which generally entails an upfront retainer and 5-7% of proceeds raised success fee. Obviously the bigger the raise the smaller % success fee.
Thanks. I work closely with the capital markets/investment sales side of a major brokerage and have never seen an equity stake pitch book. I'll keep my eyes open.
Its likely that you may be only doing debt deals. I know there are several groups within RE brokerages that call themselves capital markets. Some of these groups only work on sourcing debt transactions. It depends on if your group handles equity placements.
For reference, retainer fees are both common but also beneficial for both parties. Most legit placement agents will only take on between 5-7 fund clients per year, and raising a fund is a long and stressful and testing process. It wouldn't be too bad for a placement agent to instead of taking on 6 clients, they take on 10 clients with the intention of cutting off 4 of the funds who's fundraise is looking shaky or struggling. If you are one of those funds that just got cut off, you just lost 5 months of time.
A retainer fee gives the agent a fiduciary duty and contractual obligation to the PE client, that way both sides know that they will end up getting paid and getting a service.
Using an equity placement firm to fund a deal (Originally Posted: 06/25/2015)
For those who have successfully used an equity advisory group (and we all know there are a bunch of them out there), was the equity fee (I know it typically runs (2% of equity raised, plus or minus) capitalized as part of the deal?
As an example, on a $50M purchase, assuming 60% debt leverage and a 90/10 JV equity structure, the equity placement would be $18M. At 2%, that would be a $360K fee, Would that fee be part of the transaction costs (acq fee, debt origination fee, closing costs, legal, DD, etc), so in essence the GP is only burdened with their pro rata 10% share?
I remember when I was working for an LP fund, we were always approached by advisory groups looking for us to put money into deals with sponsors, and almost every time, the proforma would show the equity placement fee being rolled into the total deal and paid prorata.
It would seem that it's a no lose proposition for the GP to hire a firm, if they successfully bring in the LP, the GP only pays a fraction of the fee. Am I missing something?
Additional more simple question: If you want to raise 1MM, does the equity placement firm (who is charging say 2% of the total equity raised) aim to raise $1,020,408? After the equity raiser takes their 2%, the principal is left with their requested $1,000,000. Is this taken into account? 980k might not get it done for the principal given a $1mm raise and 2% fee. I'm obviously talking small money in this example but the point remains.
to your first question, yes, it is capitalized. whcih relates to your second question: because it is capitalized, it is part of the overall capital stack, and the equity is a certain percentage of that capital stack. so the equity is raised to fund a certain portion of a capital stack, regardless of whose fees show up where in the total cost.
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