The issue of whether to use a placement agent is one that we are asked to advise on quite frequently. It’s a good question, for sure. In our experience the answer varies from situation to situation, and may not be straight forward. Many factors drive the analysis. Is it a manager raising for the first time, or a manager with a long established investor base and lengthy track record? Is it a smaller manager with no investor relations or marketing personnel in house, or a larger organization with considerable bench strength internally for fund raising? Is the team at hand sophisticated at fund raising? Is there stability in personnel and strategy, or have there been changes that must be explained to the market? Is the strategy one of general venture capital, or is it in some highly differentiated niche within that space? Is the fund manager happy with its investor base and is that base providing the best long-term chance for success? What are the economics involved in engaging the placement agent and how do the terms of the fund’s governing agreement accommodate the payment of such fees and costs, if at all? These are all issues of vital importance in figuring out whether a placement agent might help in the fund raising process. We talk to our clients a lot about these issues, counseling them directly, and helping them to come to a conclusion about whether to get additional outside help in their fund raising efforts.
Quite often, we hear the following thought: “Placement agents are expensive, and so if I can raise my fund without one, I’ll be better off.” If one has to make a very broad generalization this typically is the first thought on this question that most managers have, but it suffers from some flaws in our experience, mainly because it fails to consider some cases where managers might, in fact, truly benefit from using a placement agent. To point out a few shortcomings, consider the following situations, all of which we have seen on occasion: (1) a fund manager that misjudges the level of interest in its product; (2) a fund manager that might, in fact, get to the hard cap on its fund size, but not with the best long-term group of investors likely to support later vintages of their funds and supply the best credibility or advice to the manager; and (3) a fund manager that might, in fact, get to the hard cap on its fund size, but only by way of soft demand, a lengthy fund raising period, and the attendant lack of good terms and dilution of time to do things outside of fund raising that accompanies that situation.
So, a holistic analysis of the many factors that face your organization is in our experience a healthy starting point. How am I positioned now? Do I need to change that positioning? What skills do I really have internally? How much time can I really spare for fund raising? Are there any challenges my firm might have, now or in the near future? Taking introductory meetings with placement agents (pitch book in hand, hopefully) is one of the best ways to actually examine and get feedback about issues like this from a professional outfit knee deep in these issues with their clients every day. Further, having these meetings, regardless of whether you decide to engage the particular agent, is a very valuable exercise in terms of testing your underlying pitch and thesis for the fund and getting tremendous feedback from the placement agents regarding the same. Come prepared to these meetings not just to run your pitch, but to ask specific questions about the advice the agent would give, and the strategies they would recommend for use, to address any specific factors about your fund raising situation that you have been able to identify – whether from the list above or otherwise.
Beyond our own experience, in writing this post, I thought it would be meaningful to gather feedback on the issue of placement agent use from some of the veterans we see working regularly in the venture capital fund raising space. (Side note: do make sure before going down the road with a prospective placement agent that they are a registered broker-dealer, in good standing.) The first question posed to them was to explain what they saw as the biggest benefit of using a placement agent. Mac Hofeditz of GCA Advisors noted that while successful businesses mostly have a marketing and sales team in house, most fund managers do not. Hofeditz honed in on the ability of the agent to act as an outsource replacement by turning to an agent to provide counseling in respect of things like “understanding current market conditions, gaining accurate insights into current LP appetite, recent program changes, understanding investor perceptions of a firm/product, and importantly understanding how to best execute a fundraise specific to a fund manager’s set of circumstances (such as LP composition, current performance, team changes, etc.).”
Robin Tyrangiel of Eaton Partners agreed and went a step further in describing the possible help the agent can provide. Tyrangiel explained that “the best placement agents act as true partners to the fund manager. They will work with the fund manager behind the scenes to refine the positioning, messaging and differentiation which goes beyond just brushing up the materials. Sophisticated placement agents act as an extension of a manager’s investor relations team, helping design best practice processes internally, handling deep due diligence questions, and assisting with economic and legal term negotiations. Together these services enable a much more successful and efficient outcome for fund managers.”
I also talked to Paul Denning of Denning and Company, who mentioned that using a placement agent “saves time, allowing the GP to focus more on investing.” He added, “the agent will be marketing the fund to pre-qualified prospects, weeding out those uninterested or unable to perform, which is critical for efficiency and time saving; the road trips will be more efficient and robust as the agent will prepare the GP to be eminently qualified to go on the road, because the pre-marketing and the presentation will be refined before doing so.” Denning mentioned another interesting aspect, noting that historically “the placement agent will be able to garner feedback and handle objections because the LPs will be much more candid about their concerns” than if the only option is to speak directly to the GP.
Another question posed to this group was whether there were, in fact, specific situations where a fund manager might most benefit from using a placement agent. Hofeditz mentioned that “many fund managers mistakenly presume you only use a fund raising advisor for a challenging process. No placement agent can fix a broken product. Unless a firm has a dedicated investor relations function, few fund managers have an accurate and timely insight into current market conditions and investor appetite for its specific product. There are probably 10% of firms who don’t require any fundraising assistance solely because of superior returns. All others actually would benefit from outside expertise – at the right price.”
Tyrangiel mentioned three specific situations that fit well in his experience for using an agent: first, “where a manager is raising their first fund and doesn’t have an existing LP base”; second “where a manager is looking to diversify their LP base by geography or type of LP”; and third, “when firms are going through change – which may be the addition of a new strategy, or succession where the founding partners are handing the reigns to the next generation”. Denning reiterated the importance of leveraging the agent’s expertise where tailoring or expanding the LP base.
A final question was to describe pitfalls that fund managers should avoid during fund raising, from a placement agent’s view. Tyrangiel noted that problems can arise when “established institutions where [current personnel] may not have been directly involved or responsible for fundraising often have an expectation for a fundraise to be quick. They believe that LPs they may know through their network or have reached out to themselves will all commit to their fund because they are giving them positive signals or are willing to meet with them whenever they are in town. Further, oftentimes newer GPs overestimate the differentiation of their own strategy or deal flow and spend too little time requesting input or feedback on how to position and differentiate themselves.” He also noted that “many GPs try to meet as many LPs as possible and get tired out from that type of fundraise, instead of a more targeted raise focused on the most relevant LPs for their type of fund and strategy.”
Denning had three pieces of advice here: first, avoid “going out early and unprepared, [thus] muddying the waters with LPs; then getting resistance and hiring a placement agent – making the task much more difficult”; second, watch out for “using a relatively unknown agent, or an agent that doesn’t understand and respect the GP’s mission for the fund, which is probably worse than not using an agent and going out alone”; and finally, “believing all of those existing LPs are ‘in’ for the next fund, only to find out later they meant the final close” (or as we would add from Cooley’s experience, finding out that they are not in at all).
A couple of different issues were raised by Hofeditz. He noted that fund managers should watch out for a lack of self- awareness, saying specifically that many managers don’t “fully understand the investment landscape from all dimensions – market conditions, firm product/market fit, and investor demand.” He also cited poor relationship management as a common downfall of venture firms as well as “confusing activity for achievement,” for example, “executing an ad-hoc fundraising strategy led by just ‘making calls’ to current and/or prospective investors based upon no other insights other than ‘I heard they invest in funds.’”
I’d have to agree with just about every bit of advice I heard from our placement agent friends. The complexity and variety of their responses speaks to the underlying complexity of figuring out one’s place in the fund raising ecosystem, and crafting a strategy to get from point A to point B in the most efficient, timely manner, keeping cost in mind, and of course, actually getting to point B.
We help our clients a lot with fund raising strategy from our bench as fund lawyers, and we’re always happy to talk about it with our clients. We have seen many of them act on our advice without a placement agent and end up with a sensible mix of long term partners. In other cases, though, factors exist that certainly warrant considering, sometimes strongly, using an agent to achieve the best result. You should give that thought at your next fund raising, and all the ones to follow.