27 October 2016
Some funds such as CalPERS have been dragged into financial scandals. Photo: Bloomberg
Some funds such as CalPERS have been dragged into financial scandals. Photo: Bloomberg

Evolution of private equity placement agents

Private equity and venture capital agents are everywhere. Some of them focus on recommending projects to funds, while others refer funds to investors.

Since licenses are not required to put up this kind of business, I believe there are more agents in the industry than in the securities or property market.

Every time I attend a big exhibition in the mainland, I would encounter several of these agents trying to introduce a whole range of projects that are seeking financing. Once I met an agent who represented eight companies seeking funding at the same time.

A friend of mine, who has been fund manager for many years, quit his job to establish a placement agency in the industry. His job is to identify promising projects in the mainland and recommend them to big venture funds in Hong Kong and elsewhere.

Before, it was very easy to find buyers if an agent had a mandate from sizeable private companies because it was a seller’s market.

My friend was able to close deals worth a combined US$40 million and got a 3 percent commission.

Later, some agents became “fund managers”. When they received a mandate from several renowned projects like or Uber China, they would require a certain amount of annual management fee from the funds, in addition to the commission, or share the profit when the investor exited successfully. Thus, they became funds on a deal-by-deal basis.

Many private equity or venture fund managers have also turned into agents. That’s because they felt frustrated that the funds they served almost always rejected the proposed projects, believing that networks were more valuable.

To be honest, a big part of the income of fund managers is the salary plus the carry interest after successful exits.

However, whether a project will succeed or not is highly uncertain, so sometimes short-sighted fund managers conspire with agents to invest in a project to gain higher income.

Meanwhile, some agents who seek Limited Partnership investors for funds were also reported to have been involved in scandals.

For example, Fred Buenrostro, chief executive of CalPERS, the fund that manages the US$300 billion worth of pensions for California’s retired public servants, was sued for receiving a bribe from a placement agent, Alfred Villalobos.

As the role of placement agents become increasingly important for US private equities and considering the previous scandals in the business, many states have banned placement agents to prevent corruption.

In Greater China, however, agents are just an emerging breed.

But as the legal system in the region is different from that in the United States, I believe such issues will not happen in the region in the short term.

This article appeared in the Hong Kong Economic Journal on Jan. 4.

Translation by Myssie You

[Chinese version 中文版]

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Director at Spring Capital

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