10/28/2009

Placement Agents Shift to Advisory Focus

With few funds in a capital-raising mode, placement agents have shifted their focus to advising fund operators and their limited partners on how to navigate the troubled real estate market.

Industry pros said 2009 will be remembered as the toughest year in recent memory for placement agents, with the bear market forcing the downsizing of operations. The survivors are being asked to defend their industry's past practices to the SEC, even as they struggle to keep their businesses afloat.

"The people who remain are the ones who have been able to transition the business to advisory services in a much tougher environment," said one market veteran (see list of placement agents on Pages 9-10).

With their main line of business - soliciting capital for new funds - largely dead for now, placement agents are assisting fund operators on interactions with their limited partners, such as gaining approval for extensions on investment deadlines. They are also helping fund operators figure out how to retire debt and to line up equity for sidecar and co-investment vehicles that would bolster troubled assets. Placement agents are increasingly sitting on fund advisory boards, attending annual meetings of fund investors and advising limited partners on the potential sale of fund stakes on the secondary market.

Such activities currently account for more than half of the business for Morgan Stanley's private capital markets group, according to managing director Robert Weaver, who heads the operation.

Said Thomas Boytinck, co-founder of New York-based Farragut Capital: "Placement agents are increasingly making sure that fund sponsors and their investors are on the same page during difficult market conditions."

Placement agents are hoping that their core business lines will start reviving next year. George Ahl, principal of M3 Capital Partners of New York, said that the combination of aggressive writedowns and the stock-market rebound is positioning many U.S. institutional investors to get back in the game. Foreign investors are also expected to step up. Those factors should enable some fund operators to start or resume marketing vehicles.

Also, placement agents expect to see a long-awaited increase in assignments for the recapitalization of properties, portfolios or entire companies. "With a billion dollars a day of refinancing for the next four years, opportunities have to emerge at some point," said Bill Thompson, managing director and group head for Credit Suisse's placement-agent unit.

The industry still has a sword hanging over its head. The SEC has proposed banning the use of placement agents to solicit capital from public pension systems as part of a larger effort aimed at stopping "pay to play" practices by advisory firms. But following widespread opposition from placement agents, fund operators and investors, market players expect the SEC to back down. Final action on the proposal is expected next month.

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