Note: This is the first in an occasional series that will examine obstacles and pitfalls involved in raising a private equity fund. Suggestions for future posts can be sent to firstname.lastname@example.org.
Firms often convince themselves that they can raise a fund without any outside help. They’ll hit the road, hats in hand, and hit up lots of potential investors, even when they “still don’t have their stories straight,” a buyout pro said at a recent industry conference.
Trying to find a placement agent after that is difficult. After all, placement agents know it’s hard to un-ring the bell with investors who’ve already heard the pitch. Most of the time, the agents will say, “Good luck,” and be on their way to a client they can actually help.
But is it impossible to land a placement agent in a situation like this? Does a fund’s launch amount to a Rubicon that can’t be recrossed?
Under some circumstances, firms that have already launched funds can still secure outside help. If the fund is doing well and ends up being marketed more widely than anyone thought, it can be a win-win to bring in reinforcements and give them a limited mandate to expand the investor base. But that’s only if the PE firm went from marketing the fund to employing a placement agent. The situation gets much harder if the PE firm wants to take on a second one, a partner at a prominent agent told me.
“The buyer community is still relatively small, so they tend to have a good sense of who’s come out [with a fund], who’s done the pre-marketing—and if they see a new horse in the middle of the process they become very skeptical,” the partner said. And it makes less sense for the agent to take on a project like that because the agent will have even less of a clean slate to work with. “Most good agents want to have some measure of control over the creation of the documentation and the structuring of the message, the marketing, before it goes it out,” my source said.
He also told me that his firm had accepted a limited mandate to work on a small PE fund that had already been launched. Well into the process, the fundraisers recognized they were less than knowledgeable about how to crack a particular segment of investors, or even where to start. So the agent simply provided a list of names. If any of those investors end up biting, the placement agent will get a kickback—and, more importantly, the inside track on securing the small firm as a client when it raises its next fund.
Bottom line, decide on the path to take early on, and be sure about it.
My next installment in this series will look at how PE partners screw up their fundraising pitches.