Place Your Bets
On the panel:
Martin Anthonsen, Monument Group
Alexander Apponyi, BerchWood Partners
Terence Crikelair, Champlain Advisors
Armando D'Amico, Ancathus Advisers
Antoine Dréan, Triago
Mounir Guen, MVision
Is fundraising going to get tougher over the next 12 months?
Crikelair: On a relative basis, it should. However, the amount of cash returned to LPs in recent years from alternative investments continues to attract attention. So new investors are entering the market regularly. Barring any major correction, which might push allocations overboard, the market should stay steady for the near term. The new LP entrants will likely replace those that either try to time the market or are stepping back.
Dréan: I think the answer is yes. It's already getting tougher, for the simple reason that it has been a little too easy for the past two years. The availability of credit means a lot of private equity firms made a lot of money and investors were desperate to get back into funds and to up their commitments as soon as possible. Now that's all over, so of course fundraising will become more challenging.
Anthonsen: Ease of fundraising is, in part, determined by how much capital limited partners have available – an investor's target allocation to private equity is a moving target because, as a percentage of overall assets under management, it depends on the state of the balance sheet. What we saw happen from 2000 to 2002, for example, is that equity markets fell precipitously and that meant the capital available for private equity shrunk. That hasn't happened this time around – yet. The equity markets are still pretty close to their peak levels. But if it happens – and you have to assume that risk is there – it can happen very quickly.
D'Amico: It's a crystal ball question. I think at the large end it will slow, but the mid-market, which should theoretically slow too, will be buoyed by the number of special situations funds coming to market. There are 30 to 40 operating in Europe at the moment, many of which are first-time funds, or for whatever reason haven't been on the radar screens of investors and placement agents before.
Apponyi: I think less will be raised in 2008 than was raised in 2007, and for the mega end of the market things are going to get very difficult. For the mid-market things will get slightly easier, because investors will be looking for new homes for their money. And I think venture will see something of a fundraising renaissance.
What does a tougher fundraising environment mean for you as a placement agent?
Dréan: I think it's good news. When things are easy not everyone is going to choose to use an agent. But when things get tougher – not dry, but tougher – then people need agents again. We are very much focused on special situations and niche strategies, which are going to be a flavour of the year, so that helps, too. The bad news will be for people who have focused on working with the very big funds.
Crikelair: It depends on the agent's model. Large shops that rely on size and flow may be challenged to find, and close, enough deals to maintain budget. The fundraising cycle may be extended and LPs may step back from the market and become more discerning in light of the credit crunch and slowdown in fundraisings. Smaller shops can continue to be selective and patient.
Anthonsen: If equity markets do start to fall and LP programmes become over-allocated, capital can dry up quickly. Then fundraising will become much more difficult. Some of the firms that haven't been using a placement agent may rethink that decision.
How will you choose which funds to work with in 2008?
Apponyi: Whatever people tell you, as a placement agent there is only so much pioneering you can do. We are brokers. We have to bring LPs what they want to buy. So of course we like emerging markets – and so does everybody else.
Anthonsen: I think we are seeing an increased appetite for strategies focusing on distressed situations. We have recently launched Cerberus's international fund – although that's not driven by climate for us. We have raised funds for Cerberus since 1998. If an opportunity emerged to raise a best-in-class European distressed fund, we would love to work with them, but again, I could have said the same thing at any time in the past three years. We always look for the best opportunities in each sector or segment, and that won't change.
Dréan: What we are looking for is the quality of the team and investment strategy going forward. And that second bit is the important part. Most LPs and agents focus purely on the past, but as we all know, that is no guarantee of future performance. I think that will become very obvious watching the progress of the former masters of the universe in 2008 and 2009. So we are looking for interesting strategies, where people add real value, not just excess leverage.
Is there any segment of the market you would rather avoid, or would particularly like to access?
Dréan: Not really – it's more of a micro-decision than that. We look for a team and a strategy that we like. Obviously, there is a lot of hype around Asia, but perhaps there's too much hype. So we remain focused on interesting funds in the US and Europe.
Crikelair: Given the number of players in the mid-cap buyout space, I think it's challenging to find GPs that have a unique competitive advantage versus their peers in that part of the market.
D'Amico: Southern Europe and Germany are both very interesting. There is a lot going on there. In Italy, for example, a lot of new funds are coming to market, including special situations. And don't forget Central and Eastern Europe.
Apponyi: For us, Asia is certainly interesting, particularly China and India. Japan is the one area that has been left behind. There are also opportunities in sub-Saharan Africa, particularly South Africa, where there are now two $1bn (€675m) funds. Brazil is interesting in South America, and Russia is picking up. Everyone is also talking about distressed, of course. I think it depends what you mean by distressed. On the debt side the opportunities are limited unless you are a Blackstone or a Kohlberg Kravis Roberts.
I think the real opportunities come at the operational turnaround stage. The US is already in recession and if it is not careful the UK will talk itself into one too. Very few existing mid-market funds have the capability to do turnaround deals, so there are real possibilities there.
Finally, there are opportunities for sector specialists – which have the industry knowledge to help ailing businesses, and which provide LPs with the ability to control their own allocation strategies. We will see more of that in Europe.
How do you differentiate yourself in a pitch?
Anthonsen: Competition for mandates in the placement agent industry seems to solve itself. We are slightly differentiated because of our buy-side experience – the majority of people at Monument are former LPs – which is either something managers want or don't want.
Guen: At MVision we create and grow brands. We may work with a first-time fund in an emerging market, for example, and over the course of that fundraising we will help create and institutionalise a local hero. That is one way in which we are different.
D'Amico: We focus almost entirely on the mid-market, but specialise in working on complex fundraisings: where there is one dominant LP, for example, or first-time funds.
Dréan: We have an interesting stable of investors. About one-third of our core LP base are wealthy individuals or influential global families, who can bring more than money to a fund and can help private equity firms conduct their business.
How is the competitive landscape evolving in the placement agent industry?
Anthonsen: On the surface, barriers to entry should be low, but we haven't felt any tightening of competitive pressure. I think there is more of a hurdle to setting up in this industry than at first there might appear. You need a track record. It is also important to have strong relationships with the LP community and to know what people are looking for so that you don't waste the time of either your clients or investors.
D'Amico: Barriers to entry are low. But barriers to success are high.
Apponyi: The barriers are low from a capital requirement perspective. It is a process/relationship-driven business and anybody could give it a go. But there have been relatively few new entrants. If anything, some of the investment banks have dropped placement. Morgan Stanley is the only one I know that is setting up in this area at the moment. And that is because it is looking to raise a $6bn fund. I do expect to see more acquisitions of placement agents though. Helix has been acquired by Jefferies, Crane by Bear Stearns, and there will be more. That is what investment banks do.
Dréan: There are around 100 true agents globally and there haven't been too many new entrants recently because money has been too easy to raise. We may see some more now though, particularly if the large investment banks start firing people, or investment bankers start looking for something else to do because their bonuses are lower than they would like.
Guen: Anybody can pick up a phone book. That's true enough. But not anybody can run a fundraising and advise a client. I've been doing this for more than 20 years, raising over 250 funds. That experience is not easily replicated.
How are placement agents evolving over time?
Anthonsen: Most firms of size are now looking to raise capital globally, and that was only really the case for a small handful ten years ago.
Guen: Global is certainly important and we have always positioned ourselves aggressively on the global stage. But the other evolution is that what are needed now are not so much sales people, but M&A banker-orientated people who really understand the investments. The smile and dial aspect of our business is largely redundant.
Dréan: Ten years ago this was a Rolodex business – all about mailings and phone calls. It was simply a question of who you knew, and that worked, because the industry was very opaque and LPs couldn't identify good GPs, and vice versa. Today though, private equity is very transparent, so those that stuck to the Rolodex method tend to have disappeared or are really struggling. Those that evolved, for example by specialising in access to different types of investor, are doing well. Others have become less placement agents than investor base management businesses. And that has worked well too.
Are placement agents broadening into new asset classes?
Apponyi: Some placement agents have certainly moved into hedge funds, secondaries and even directs, raising money for the corporates themselves. We are actually strategising about whether to move into hedge funds at the moment. My personal feeling is that in Europe and the US these are still two very separate asset classes and either that means going to different institutional investors entirely, or at the very least, different people within the same organisation. The only real overlap is with family offices and Middle Eastern and Asian LPs. It takes time to build those relationships. But it can be done.
Guen: There is no right or wrong. But there are very few synergies between these different areas. So it requires dedicated manpower. They are just separate businesses running in parallel. We prefer to focus on primary private equity funds in a return-generated business model, picking the best performers.
How have the terms on which placement agents work evolved and are they likely to be affected by a downturn?
Anthonsen: There is a natural hedge in this business, when everything slows down and its more difficult to raise, fees tend to shift upwards.
Guen: It depends on your business model. If you are looking to get the highest fees by client hopping, rather than long-term loyalty, you may raise a fund for one firm at X cost today, but go to that firm's competitor for X+1 next time. Of course, that depends on the competitor hiring you and it is a risky approach to take. You also hear rumours of placement agents "buying business". Investment banks, for example, have the potential to blend their investment banking and placement operations, in terms of covering costs. So every now and again you will hear of an agent positioning themselves aggressively. If you have done nothing in Europe for ages, for example, you might be prepared to take on a client at a reduced fee to secure future business in the region.
Apponyi: There is always pressure on terms. At Berchwood we only work on a limited number of mandates each year, so we would be reluctant to take on a much reduced fee scale. But you have to remember there are hundreds of ways to cost fees. There are success fees, follow-on fees if LPs re-up on later funds, co-investment fees and all sorts.
Dréan: Agents that are not providing a full service – in other words those that just sit on the phones all day – have necessarily reduced their fees quite heavily over the past few years. Those that really add value are still charging between 1.5 per cent and two per cent.
Are you bullish or bearish on mega-buyouts in 2008?
Guen: Mega-buyout houses started down a very interesting road doing some very exciting deals. My advice to them is to continue what you started because you were doing a good job. I think there are some very large deals out there waiting to happen and these firms have the expertise to make it work.
Apponyi: I am bearish. These mega-buyout houses are trying to raise the same amount in 2008/09 that they were in 2006/07, but deal flow has fallen off a cliff. These firms are full of hot air. They are asset gatherers more concerned about management fees that creating value.
Anthonsen: If we are talking about funds of $10bn or above, I personally would be pretty careful. These firms have been profoundly affected by the credit squeeze and are also more reliant on exiting to public markets. Mega-buyout firms generally speaking are more reliant on factors beyond their control and that would make me a little careful.
Dréan: Mega-buyouts are gone. They were only possible because of the state of the credit markets over the past few years, and that was completely abnormal.
Can you foresee a situation where mega-buyout houses will have to return money to investors?
Dréan: They have already been asked to. Either that or reduce their fees. How can they justify sitting on billions and still charging 1.5 per cent. I don't know if it will happen, it depends how long the credit markets stay away. If it lasts for a year or two, I think many will be left with little option.
Apponyi: There is a lot of pressure being exerted on these big buyout houses. But the fact remains that if an investor has hundreds of millions to put to work, they have no real choice but to back mega-funds. They can't invest those chunks of capital in smaller funds or on the public markets. And returns from hedge funds, real estate, and infrastructure are all much lower. This is the single saving grace for big buyout funds.
Some LPs literally have no choice but to invest in them. The best thing that could come out of this credit crunch is that GP and LP interests are brought back into line. But it won't happen.