Banks move to offer free placement services

Placing funds is extremely cyclical. In the good times, fees roll in on the back of hard work. In the bad times, agents work diligently to be able to afford beans on toast for dinner. A wall of fundraises this year and next should suffice to keep all of Europe's agents in business. But it isn't: This year saw Matrix Private Funds Group shut its doors, the latest in a string to bow out. What is causing the shake-up?

Ferocious downward pressure on fees, for a start. EQT is set to launch its sixth vehicle imminently, with UBS acting as its new placement agent, following a couple of successful fund generations with independent adviser MVision. Normally, barring any major conflicts, GPs stick with their placement agents for follow-on vehicles, not only owing to the comfort of ‘better the devil you know' but also because of the financial incentive a tail brings with it. So what happened?

The world will never know precisely, since, unsurprisingly, no one in the know will spill the (hard-earned) beans (one firm gave a firm ‘no comment'; the other two didn't respond whatsoever). But suffice to say UBS offered an "extremely attractive" pricing structure. So attractive that, despite a target of €4.25bn, EQT are likely to pay next to nothing for the service.

This is likely a move by the bank to increase market share in a downturn. A very old trick indeed. But with a banking bastion like UBS, it goes a step further. Since by getting EQT on board with a free placement mandate, the bank is likely to clock up future fees with ancillary services. M&A comes to mind initially, since the fee on just one mega-deal is likely to dwarf any placement fee. But UBS also operate a strong secondaries business as well. "If they have three LPs who can't re-up, there are suddenly three secondaries that have to be done. So there are fees for that, too," says one secondaries specialist. "Fundraising and secondaries are part of the same process."

Unsurprisingly, some are outraged by this step. Says one Luxembourg-based administrator: "[Free placing] is actually very common here and is not without problems! In particular, we have been arguing that the depository, delegation, conflict and disclosure provisions in the AIFM Directive [should] effectively outlaw the "banking model" of fund management as it is impossible to trace and supervise the cross-charging through connected companies (in particular, being mindful of best execution and fiduciary/no secret profit rules)."

Indeed, best practice has seen accounting firms shed their placement teams since such multiple services can see conflicts - for example placing a fund and then auditing that fund's portfolio companies. Deloitte in London is an example of this. "The conflict at banks is less tenuous, and banks are more vigorous at watching themselves vis-à-vis the SEC, so they're likely to carry on offering the service," the secondaries player suggests.

But just as some feel the practice is dirty, others are more nonchalant. "Banks may as well offer placement for free because at the moment it must be tough to make enough to sustain the business unit," Dermot Crean, managing partner at Acanthus explains. "They are geared up to place mega-funds, and there aren't many about."

Crean is cool about banks' aggressive foray into his space since the newfound hunger is unlikely to make much of an impact on his territory of mid-market firms. "Mid-market firms don't typically pay large fees to major banks for M&A or debt so this shouldn't hurt our business."

This is also likely to be because smaller, less established firms often prefer the 'personal' service a boutique can offer. Helix, for example, built its reputation for assisting spin-outs with the successful raising of Exponent, and then Altor after that. But it therefore follows that a good placement agent, while extremely significant for the first few fundraises, should make itself redundant as the firm matures. This is where the practice can be scaled back, either to a fairly anonymous i-bank, or outsourced to a fund administrator. Some firms prefer to do it entirely in-house through a sophisticated IR team once the LP relationships are established (though this round of fundraises should test their longevity).

“The evolution of banks’ offering free placement is akin to the M&A market in the boom years. In order to get the debt, you did the M&A work for free – and look where that got us.”

Acanthus held five closes last year, showing that some independents can still make it. MVision also fared extremely well, clocking up seven final closes and six interims in 2010. So while the going is tough, it's certainly not impossible for independent placement teams.

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