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If we look at the numbers, 27% of all fund managers in the US use a third-party fund marketing firm. However, given that most of the more established fund managers often have their own sales and marketing channels, the proportion of emerging fund managers that use one of these placement agents is probably considerably higher.
Raising capital is often the area of activity that most fledgling fund managers find the most difficult. This is because it requires a level of knowledge and expertise, plus access to the right people, that most fund managers simply do not possess.
A placement agent can help you short-circuit the system by outsourcing some of your sales and marketing activity to people who specialise in this. This can save a lot of time and energy, especially when it comes to smaller asset management boutiques that simply don’t have the time or capacity to devote to this crucial area.
If you choose wisely, a fund placement agent can open up an entirely new network for you and become an invaluable resource for your business.
Here we should say that for the purposes of this article, we use the terms placement agent and third-party marketer interchangeably, but in reality there is a slight difference in terms of which markets they cater for.
Third-party marketers typically work with institutional and retail-focused managers that manage large institutional portfolios, mutual funds and the like. Meanwhile, placement agents tend to service alternative managers such as private equity funds, hedge funds, real estate funds etc. Within those broad definitions, each firm will have its own niche where it focuses its attention.
Placement agents and third-party marketing firms act as intermediaries between fund management firms and the former’s network of industry connections, which can include institutions, family offices, High Net Worth Individuals (HNWIs) and financial advisers. Their appeal lies in the fact that they know their client base very well and can identify products that would potentially be of interest to them. This can help expedite the sales and marketing process for a fund management firm, which may not have the internal capacity to pursue such a process effectively.
Services provided by third-party marketers and placement agents can include:
These are all activities that can be time- and knowledge-intensive, so the appeal for smaller fund boutiques with limited internal resources is clear.
When choosing a placement agent, you have to be sure that your choice of agent is absolutely aligned with what you’re doing and completely understands your product – that’s a very obvious but nevertheless important point. Ideally, you want to know that they have experience of selling a similar product, which can give you a degree of confidence in their ability to execute.
By now you’ll also have established your target market in terms of geography and client profile etc. so you should make sure the agent is the right fit there. Placement agents will all come with their own area of expertise and network of contacts, so there’s bound to be one that fits your requirements, but you may have to track them down. To start off your search, you can often find resources on the web that provide a directory of different service providers (here is one such list of placement agents).
Raising money for an emerging manager requires a very different skill set than for an established manager, so be aware that there are relatively few placement agents out there that deal with emerging managers AND are good at looking after them. This is why it’s so important that you do your due diligence (see below) and ask for referrals/recommendations. You should also try to speak to existing clients to get an idea of their experiences.
Does your agent have any general operational capabilities or insights that you can leverage off? For example, they often have valuable insights into what types of fund structures and which jurisdictions tend to fly well with their network. This could save you a whole lot of time and hassle if you can engage with this from day one.
Another key factor to consider is how well respected the agent is with its target market and client base. For example, family offices and HNWIs will often lean heavily on placement agents to bring them interesting products that they would not otherwise come across.
In terms of fees, there is no one-size-fits-all, but you can expect to pay somewhere between 20-40% of management fees as a rule of thumb. This is often in perpetuity, although some agents will simply ask for the fees to last for a certain number of years while AUM remains with your firm. You can also expect to pay a retainer, which is there to ensure the client (i.e., you) is serious about the capital raise. In some cases, this may be tapered away as the agent earns a certain threshold of management fee share.
Some agents will ask for a share of performance fee (where applicable). While many managers are fiercely reluctant to share their performance fee, it can be good business if it incentivises the agent and aligns everyone’s interests. Pro tip: Don’t be frightened of being generous here if it makes the agent your biggest cheerleader and advocate.
In some cases, you might even want to consider giving sweat equity to a placement agent in order to cement the relationship and further incentivise them on your behalf.
Caveat emptor: While a retainer is industry standard, be aware that there are placement agents out there that will simply look to build a pool of retainer fees, lock you in for a period of time and do the same with a number of other clients, while delivering very little by the way of tangible results.
Pro tip: Often, placement agents will ask for exclusivity. Under no circumstances should you agree to this – it can actually kill your business.
Barriers to entry in the third-party marketing space are relatively low, which means the quality of placement agents can vary significantly. It’s therefore imperative that you do proper due diligence before you become affiliated with an agent – and they will naturally want to do their own due diligence on you as well.
In some cases, after doing its own due diligence, the placement agent may decide that it’s not the right fit for you. Don’t be disheartened by this: the placement agent could simply say yes, collect the retainer and do very little for your business. If the placement agent doesn’t have the right network or doesn’t believe it can effectively market your product, it is saving you a lot of money and grief by turning you down.
Reality check: responsibility for the product still lies with you!
Regardless of whether or not you hire a placement agent, you will still need:
The placement agent can’t work miracles if you haven’t got your own house in order to begin with. As a newly launched boutique fund manager, it’s to be expected that your marketing pitch might be a little rough around the edges, and placement agents will be more than happy to provide their input in terms of how to best pitch your product.
However, you should make sure you come to them with something that is at least well beyond the conceptual phase, otherwise don’t be surprised if you’re politely shown the door. At the end of the day, the third-party marketing agent is there to make money. If they believe your product needs too much work or is too much of a hard sell, they won’t waste their time on it (or at least they’ll be happy to collect the retainer and waste your time and money in the process).
And even then, you should absolutely not be wholly reliant on your placement agent when it comes to marketing. Ultimately, you are the best advocate for your fund, so make sure you are marketing yourself in some shape or form.
This could be as simple as posting regularly on LinkedIn, writing a regular newsletter or attending networking events. But don’t fall into the trap of assuming you can leave everything to a placement agent and forget about it.
Disclaimer: This blog is intended for informational purposes only. This blog is not intended to invite, induce or encourage any persons to engage in any investment activities and is not a solicitation or an offer to buy or sell any stock, investment product or other financial instruments. If in doubt, please seek financial advice from an independent financial adviser. Sarnia Asset Management is licensed by the Guernsey Financial Services Commission (GFSC). Past performance is not an indication of future returns. Investments carry risk, including the risk that you will not recover the sum that you invested.
By James Faulkner
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