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 US Securities and Exchange Commission. A placement agent operating in the US must be registered as a broker or dealer.
Understanding Placement Agent
A placement agent serves a vital function in the fundraising market. Placement agents are hired by investment funds (e.g., 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.
- A placement agent is a registered agent who connects investors with companies offering securities.
- Some placement agents provide other services, such as negotiating, preparing marketing material, and developing targeting strategies.
- Placement agents negotiate several terms, such as compensation and exclusivity, of their agreement.
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 the successful placement of the fund with the investor(s) introduced by the agent. The agent's compensation, around 2% to 2.5%, is typically a percentage of new money raised for the fund. 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.
Under ordinary circumstances, if the issuer of the offering terminates the agreement, the placement agent foregoes commissions. However, a tail provision entitles the agent to a commission post-termination if the offering occurs within a certain period, usually less than one year. This provision must be included in the agreement to be valid.
Most provisions within a placement agent agreement can be negotiated between the placement agent and the issuer, with compensation being the most commonly negotiated term. Most compensation is paid in the form of commissions on the amount raised; however, placement agents can negotiate to receive more. For example, they may agree to also receive other consideration, such as stock options.
Also, issuers sometimes agree to exclusively use the services of a placement agent; therefore, no other placement agents will be used for the subject offering. This arrangement along with other provisions will be included in the placement agent agreement.