Jockeying for position

It's hardly a secret: the fundraising market is tough at the moment. The combination of a gloomy economic backdrop, plummeting deal activity, underperformance of current vehicles and much publicised LP liquidity issues have caused a dramatic nose-dive in the number of funds coming to market, while those already in the market remain conspicuously quiet. Indeed, according to unquote" data just 23 funds held a close in the first five months of 2009. Extrapolated, it's still less than half last year's record 156 closures on EUR96bn, itself achieved against a deteriorating economic climate.

What is less clear is the effect this current dearth of fundraising is going to have. In relation to private equity fund managers, the stock piles of dry powder that remain from the boom years should allow most to ride out the current storm. The focus for now is rather on incumbent portfolio management, so that when it does come time to raise again there is some performance to show to prospective investors. For placement agents on the other hand, whose livelihood depends on the ability for funds to be raised, the story may be very different.

Out with the new ...

However, the fact that there is little news of funds raising or closing should not be taken to mean that there are not firms looking to launch new vehicles. There are inevitably going to be groups that are coming to the end of the investment life of their current fund and therefore need to go back on the road. The number will be lower than in recent years however, owing to the negative backdrop. But this does not necessarily translate to substantially reduced demand for agents: "People realise its tough at the moment: some that wouldn't have previously used an agent are now doing so and this is to some extent offsetting the slower activity," explains Martin Anthonsen, managing director of Monument Group.

That said, actually securing commitments and closures for these vehicles (and therefore earning revenues) is proving extremely difficult due to ongoing LP liquidity concerns. While issues such as the denominator effect now appear to have been exaggerated, the difficulties caused by over-commitment strategies and the problems that persist on balance sheets are all too real. "LPs are finding that they have less to spend and a large chunk of what they do have is being set aside to sort out their allocation architecture," confirms MVision CEO Mounir Guen.

Not only are investors focusing on funding their over-commitments first, but much of what is left is being reserved for alternative strategies where there are perceived opportunities. "Many LPs are looking at secondaries and co-invest as both allow you to have a shorter j-curve at good prices," continues Guen. "Overall, most are left with about a quarter of the firepower for new primary investments they had last year, and then the first thing they are concentrating on is re-ups." Even 2010 may not be much easier: congestion may ensue as an improved (though still comparatively modest) LP capital pool is besieged by a swathe of new vehicles.

The silver lining

Notwithstanding the problems caused by these emergent trends, for placement agents they are also providing new opportunities. This is especially the case in relation to secondaries, as the agent that raised the fund is often charged with finding a replacement when an investor requires an exit. "We do assist LPs of our clients and also very selectively investors of other high quality funds in selling down interests; demand for this work has increased over the last six to nine months," says Anthonsen. One major placement agent is even thought to be raising a fund from its client base in order to plug these gaps itself - which would produce a steady inflow of management fees and some potentially lucrative carry down the road.

And difficulties in incumbent funds are also a source of dealflow in other ways. For starters, many GPs are bringing in their agents to help manage relations with their investor base, which has become something of a priority given repeated reports of growing discontent in the LP community. Moreover, the decline in performance in many buyout funds has given rise to a surge in new raisings. "The need for equity-cures and re-equitising of portfolio businesses is resulting in a number of top-up and annex funds coming to market," comments Andrew Bentley partner at Campbell Lutyens.

Coming to market they may be, but like primary vehicles they are not easily securing capital. As was widely observed when KKR recently announced plans to raise a top-up vehicle to its second European fund, LPs are uncomfortable at the prospect of having to sacrifice returns to the new fund. "LPs are generally wary of top-up funds and typically, therefore, these vehicles will not seek management fees or carry and often the GP also has to make an additional commitment. GPs are asking LPs to save them so they have to make it as attractive as possible," Bentley continues.

The kickback

It is not just a lack of capital in the market that is causing problems for placement agents, which have been rocked in recent months by the "kickback" scandal in New York. The issue surrounded payments made by agents in return for ensuring that state pension funds made commitments to their funds. Several high-profile political figures have been indicted on charges of fraud and the funds in question have since banned the use of intermediaries. But the extent of the problem is not yet known: are GPs merely not allowed to be represented by an agent in New York, or will the funds make no contributions to vehicles that are affiliated to a placement agent?

A further, and perhaps more significant concern, is that the problem may spread to other states, and perhaps even outside the US. This worry was to some extent confirmed when, at the end of May, a New Mexico agency banned the use of placement agents by firms attempting to secure commitments from its $11bn fund. However, in recent weeks this has cooled somewhat as several states have defied the domino-effect threat. Says Bentley: "The problem is isolated to a limited number of states - others have even come out in support of reputable placement agents of late."

In fact, there is even an emerging view that the scandal could provide an opportunity to publicise and clarify what can often be a hidden part of the industry. "Part of the problem is that placement agents were not properly defined and have therefore been treated the same as 'finders'. There's a tainting that occurs and it's not helpful in this environment," Guen argues. Bentley concurs, adding that the support of some states has already helped to raise the profile of good agents - a process that the firms themselves must continue if they are to emerge with their reputations untarnished.

Careful positioning

Indeed, that placement agents must generally reposition themselves in the current climate is almost beyond question. Like most areas of the private equity industry, the role had become somewhat simplified during the boom years, with GPs bringing swathes of funds to market and a plentiful supply of LP capital seeking a home. Now, however, given the difficulties with existing funds and the obvious problems with raising new vehicles, there is once again demand for a much broader range of services.

In the short term, this primarily involves helping GPs to manage relationships with their existing investor base and facilitating the sale of secondary positions. In the long run, particularly in light of the unfolding knock-on effects from the New York scandal, the placement agent role may well maintain a much wider remit than it has done in recent years as a finder of finance. "Are they going to ban consultancies? There are lots of ways that placement advisers add value beyond simply opening the door to LPs," Bentley concludes.

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