These factors will always serve as distinguishing features among placement agents; they become more evident — and more consequential — during unexpected market shocks.
By Mike Miller, Partner, Monument Group
In March and April, when the scope of the COVID-19 pandemic became apparent, most assumed 2020 would be a year in which GPs and LPs tabled new fundraising efforts and new commitments. Considering the roughly 33% drop-off in total fundraising volume as of the end of the third quarter, it is clear that many have indeed moved to the sidelines. At Monument Group, however, seven months and eight fund closings totaling over $10 billion later, the pandemic has provided an opportunity to showcase certain differentiators that can be overlooked during less-trying times.
This is not to say that experience, expertise and culture of a placement agent and advisor do not matter during upturns. However, when the unforeseen occurs, each of these factors become exponentially more important for GPs to gain clarity and direction as the rest of the market spins its wheels.
To be sure, there is no way to predict exogenous, black swan events. What longer-tenured GPs recognize is that unexpected market shocks can leave a fundraising process in a very precarious position.
• During the global financial crisis, certain investment programs were sidelined for years as the denominator effect wreaked havoc on private equity allocations.
• The dotcom crash and the chill that immediately followed the September 11th terrorist attacks may have had an even bigger impact, evident in the heightened demand for transparency and new reporting standards.
• The financial crisis in Asia saw LPs in the region pull out of private equity for an extended period of time, leaving gaping holes in the investor bases of firms.
Experience with the Unknown
Each of these disruptions were unique in their cause and their impact. When it comes to private equity fundraising, however, the lessons learned are indeed applicable. Consider just the basic question around the propriety of when to call a contact and when to wait. The instinct, of course, is to get a sense of where potential investors may stand. In these scenarios, it can be the calls that GPs do not make that have the biggest impact on their ability to raise their fund.
Expertise that Guides a Strategy
Expertise can also be overlooked. Experience provides invaluable context, but knowledge around the appetites and misgivings of LPs can provide a strategic roadmap. This deeper understanding of the evolving market and LP perceptions can also help GPs use the extra time to their advantage, addressing any perceived shortcomings while LPs have their pencils down.
GPs will also confront some very consequential decisions during a disruption, including:
• When should a firm consider altering the fund size and if so, to what extent?
• Should a fundraise be reconsidered in favor of an alternative capital structure, such as a special purpose vehicle?
• Should a fundraise timing be adjusted?
• Does it ever make sense to offer concessions on the fund economics or are there any other levers that can be pulled?
• Which LPs will come with outsized demands, be it co-investment rights or anything else?
An intimate knowledge and judgment around specific investment programs also provides dexterity. It allows GPs in the market to make inferences about LP behaviors and specific considerations impacting their appetites. Observers saw this most recently with the endowments facing enrollment uncertainty. But in the past, and to some extent today, it is also evident across geographies, underscoring the importance of a placement agent’s global, on-the-ground presence and longstanding relationships as key markets open and shut.
Stability Found in Culture
The most overlooked factor during normal markets is the importance of culture. It is during market shocks, however, when GPs realize the value of an advisor who wakes up every morning with one objective: to figure out how to raise the fund.
If the placement agency is dealing with its own internal disruptions, it will have a ripple effect across the entire fundraising effort.
• Focus is redirected on their own internal fires;
• Efficiency is compromised when internal silos preclude a coordinated and collaborative effort;
• And strategy dissolves amid the turnover as experienced team members are replaced by new recruits.
Related to this, independence, coupled with a strong culture and stable organization, can facilitate a true team-based approach.
Just as we will perform our own due diligence ahead of a prospective commitment, GPs should scrutinize their placement-agent relationships in the same way. Track records, of course, are important. Attribution is critical, particularly in larger organizations. And tenure in the market, for all of the reasons discussed, can make a difference between a successful fundraise during a difficult time versus a difficult time made more challenging and consequential by an unsuccessful fundraise.
These considerations are always important, but first impressions are magnified during periods of stress and disruption. When the world turned upside down in March, GPs in the market with new funds recognized the value of a strategic advisor with a presence across geographies and an abundance of experience across cycles. An advisor who can help GPs determine the right investor mix and, most importantly, who will remain focused until the very last dollar has been raised will provide the clarity and direction when the unexpected occurs.
Michael Miller joined Monument Group in 1998 and is a Partner in the Boston office. Mr. Miller has investor coverage responsibility in the US. He joined from Cambridge Associates, where he was responsible for private equity research with a focus on leveraged buyouts, mezzanine debt, turnarounds and special situations.