The most recent Global Fundraising Report by Venture Capital Journal shows that capital raised in Q3 2024 surpassed previous quarters, but optimism remains limited due to increased market consolidation. While the average fund size has hit an all-time high, many fund managers are grappling with challenges in the market and are turning to placement agents (PAs) for the first time to secure commitments.
This article offers practical advice on what to consider when selecting a PA, including tips and potential pitfalls to avoid.
Key Considerations When Seeking a Placement Agent
Professionalism and Reputation: Assess the agent’s track record and industry reputation by conducting thorough diligence. It’s essential that their approach aligns with your fund's goals and image. Look for agents with a solid history of successful placements, not just impressive resumes.
Fund Size and PA Effectiveness: Effectiveness often correlates with fund size. Placement agents generally prioritize larger funds because their commission-based payment model incentivizes them to pursue big checks. If you manage a smaller fund, you may find that a PA's efforts are less effective or focused, as smaller commitments reduce their overall payout. Consider if your fund’s size warrants working with a PA at all.
Matching with the Right Placement Agent
Interview Extensively: Don't let the PA just interview you—flip the script. Ask why they believe they can be successful with your particular fund. How many clients do they work with at the same time? How much focus will they dedicate to your fund? Crucially, how much of your target raise do they realistically believe they can help you secure? Interview multiple agents and compare their answers.
Assess Their Network: A PA's value is rooted in their connections. Make sure their network aligns with the type of LPs you’re targeting. For example, if you're raising a $25M fund, a PA whose main connections are sovereign wealth funds or large endowments may not be the best fit based on the check size those institutions typically write. Ensure the PA’s relationships are suited to the size and focus of your fund.
Ask for References: Request references from funds that share similar characteristics to yours—same fund size, stage, industry, and target LPs. Speak to GPs who’ve worked with the PA to understand how the agent performed in comparable situations.
Key Contract Considerations
Retainers: While retainers might feel like a risk, data shows that PAs often perform better with one in place. Consider whether paying a small monthly retainer could ultimately help secure the capital you need faster.
Commission Rates: As a general rule, PAs charge 2%-3% for funds under $500M and 1%-2% for larger funds. Some contracts may have sliding scales that lower the commission rate after the PA hits certain thresholds. Be cautious of clauses that obligate you to pay a commission on future LP commitments for subsequent funds—they’re negotiable and should be pushed back on if possible.
Exclusivity Clauses: Many PAs prefer exclusivity, but if you plan to work with multiple agents, ensure you define clear lanes to avoid duplicate outreach to the same LPs, which could appear disorganized. You can segment responsibilities by:
Time: Work with one PA for a set period (e.g., 6 months) and another afterward.
Region: Allocate LP contacts by geography based on the PA’s strengths.
Type of LP: Assign different LP types to different PAs, such as family offices for one and institutional investors for another.
Milestones: Incorporate performance-based milestones into the contract. For instance, you could tie retainer payments to specific achievements, such as raising the first $10M, to incentivize progress.
How to Work Effectively with Your Placement Agent
Regular Meetings: Set up weekly or bi-weekly check-ins to help maintain transparency, align strategies, and provide the opportunity to adjust tactics if needed. Use these meetings to ensure everyone has the necessary materials (e.g., one-pagers, ODD documents) and to evaluate which approaches are yielding results.
Clear Processes: Clarify roles and responsibilities from the start. Who is taking the first call with an interested LP? Who sends the deck and follows up with access to the data room? A well-defined process can eliminate confusion and keep the fundraising effort on track.
Avoid Audience Overlap: If you’re doing LP outreach concurrently with the PA, ensure the audience is clearly segmented (same as if you’re working with multiple PAs). Crossing wires risks looking disorganized and could diminish the professionalism of your outreach.
Placement agents can play a critical role in your fundraising success, but choosing and working with the right one requires careful consideration. From aligning their network with your target LPs to negotiating key contract terms like retainers and exclusivity, navigating this relationship thoughtfully can make all the difference. By following these tips, you can increase the odds of a smooth and successful capital raise while avoiding common pitfalls that may arise when partnering with a placement agent.
In a challenging fundraising environment, having the right PA on your side can unlock doors. But as always, it’s about finding the right fit for your fund’s unique goals and needs.
At Strut Consulting, our white glove Investor Relations service focuses on assisting VCs in refining their pitch, targeting LPs, creating data room materials, setting up LP onboarding processes, and ensuring our clients have the right tech stack for a successful raise. Ready to get started? Reach out to us here.
