As the private equity market has evolved and matured, the traditional placement agent compensation has also become more complex.
The primary role of the placement agent is to advise on and manage the fundraising process for its fund clients and to successfully raise capital for such clients, in an efficient and time sensitive manner.
Success Fees are usually equal to one year of management fees on the money raised and range from 1.5% to 2.5%, depending upon the underlying fund strategy. Fund of funds, credit funds and infrastructure funds may end up charging lower management fees than a traditional buyout or growth private equity or a venture capital fund, and placement agents may be open to a lower percentage of success fees for such funds.
Additionally, boutique placement agents may show greater flexibility in being accommodative in the fee arrangements.
Success fees are usually paid over a one to two-year period from the close. At 5Capital, we have been flexible in the past and may allow the GP to pay us over a three to four-year period.
Additionally, 5Capital may be open to contributing a part of its success fees as an investment in the fund. We believe that by taking an LP interest in the fund, we better align our interests with that of the fund and help alleviate some of the cash outlay pressure for some of the emerging managers.
Retainers continue to be heavily negotiated between the fund managers and placement agents. The larger investment bank agents and independent placement agents usually require considerable upfront retainers to cover their high fixed costs, whereas boutique placement agents, who are only able to work on a very selective number of mandates at any time, need it to mitigate against the fundraising risks associated with a small number of fund clients.
5Capital has been able to be flexible with its retainers charging no retainers to established top quartile managers for follow-on vehicles or top-offs, to charging small retainers on traditional fundraising mandates.
Blended Fees: the placement agent and the fund manager may agree to a blended fee structure in cases where the agent is helping with both existing and new investors, which allows the fund manager to benefit from the work of the placement agent, but reduces the fundraising expenses.
Tiered Fees: the success fees may also be tiered by an increased rate for amounts raised above the target fund size or for incoming first close investors.
DUE TO DEMAND FROM OUR INSTITUTIONAL CLIENTS: We are currently interested in discussing the fundraising needs of secondaries, distressed, healthcare, biotech, and infrastructure fund managers.