What is a Placement Agent
A placement agent is an intermediary who raises capital for investment funds. A placement agent can range in size from a one-person independent firm to a large division of a global investment bank. Professional placement agents are required to be registered with the securities regulatory agency in their jurisdiction, such as the U.S. Securities and Exchange Commission. A placement agent operating in the U.S. must be registered as a broker or dealer.
BREAKING DOWN Placement Agent
A placement agent serves a vital function in the fundraising market. Placement agents are hired by investment funds, whether a private equity fund, hedge fund, real estate fund or other alternative assets, to raise capital quickly and efficiently, which they achieve by introducing the fund managers to qualified investors.
The capabilities of experienced placement agents, however, go well beyond mere introductions. Some placement agents provide value-added services such as preparing marketing material, formulating a targeting strategy, organizing roadshows, and even negotiating on behalf of the fund. These services may be particularly useful for new fund managers.
Placement agents are especially helpful for marketing a fund in places where the fund manager has limited contacts, as an introduction from a reputed placement agent enhances the credibility of the manager. Alternative sources of capital such as sovereign funds and ultra-high net worth individuals in many emerging markets and far-flung areas around the world highlight the productive role of placement agents.
Compensation for Placement Agents
The placement agent is compensated upon successful placement of the fund with the investor(s) introduced by the agent. The agent's compensation is typically a percentage of new money raised for the fund, around 2% to 2.5%. Some agents take part of their fee in cash and invest the balance in the fund, which aligns the interests of the agent and fund investors, and also reduces the upfront cash payment by the fund.