10/12/2011

Some Big Funds Target Bank Private Clients

A few giant fund shops have started supplementing their institutional capital-raising campaigns by soliciting equity from high-end retail clients of Wall Street banks.

Among the operators employing the strategy are Blackstone, Lone Star Funds and Starwood Capital. The client networks being approached include the wealth-management and private-client groups of Bank of America, Credit Suisse, J.P Morgan and UBS.

The tactic can be costly — requiring the payment of a bank fee equal to up to 3% of the capital raised. But it gives the fund shops an entree to wealthy individuals and family offices that otherwise might not be reached. And the operators can sometimes pass on at least part of the fee to the investors.

“It’s not that the banks are clamoring to the [private equity] guys,” said one fund executive. “It’s the PE firms going to the banks saying would you please, please, please market this PE fund through your high-net-worth network.”

The strategy was used occasionally before the market crash, but has reappeared only recently. One longtime placement agent said it reflects the fact that equity commitments still remain hard to come by following the downturn, prompting managers to consider all options for capital.

Because large fund managers primarily target institutional investors, their relationships with family offices and wealthy individuals aren’t as deep. So tapping a bank retail network can be “an efficient way of accessing that capital and supplementing the [institutional capital] raise,” the placement agent said. “The way some [general partners] figure is that it’s capital they could never get to, and they hold their nose and pay for it.”

A veteran fund executive suggested that the practice might also gain some momentum because of the so-called “Volcker Rule,” which limits the amount of equity a bank can invest in funds it operates. Regulators this week are hammering out a draft of the regulation, which is likely to curb the ability of banks to sponsor funds. Those banks, in turn, might become more interested in having funds from third-party managers to market to their customers.

The option is open only to the largest operators, because banks want to pitch only established managers with lengthy track records to their high-end clients. Marketing campaigns are usually limited to a matter of several months. Once commitments are lined up, the bank pools the money so that the fund manager deals with one contact.

The fees charged by banks for lining up capital vary, but two markets player said 3% was the upper end.

Some managers shy away from the tactic because many institutional investors prefer not to co-invest with wealthy individuals, who may have different return goals. The mingling of different investor classes also creates accounting issues, because the fee structures typically vary. The fee structure for retail capital usually results in a higher profit split for the general partner, which can help offset the cost of lining up that capital.

“Terms to the retail investors are more egregious than what you would get from the institutional investors,” one fund manager said. “So the cost of running something through the retail network comes out in the wash.”

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