"We don't pay retainers."
While there are many pros and cons to ponder when considering whether to engage a placement agent or marketer to assist in early-stage fundraising, the existence of a retainer should not be viewed as a negative aspect. Expecting a high-quality, third-party firm to burden the cost of creating and executing a successful marketing campaign might simply be unrealistic. While most first-time fund managers are aware of the investment required to recruit a high-octane team, many fail to recognize the similar significance in addressing the initial steps crucial to earning the trust and confidence of investors.
Factor the Fundraising Campaign into the Fund Lift-Off Budget
When managers choose to forego a professional internal or outsourced approach to fundraising, they commonly end up placing this responsibility on an internal group that lacks the experience and network to conceive, execute, and manage a credible fundraising effort. This strategy takes away from the primary focuses of each member of the team. You hired a great executive assistant, hung your finest artwork and built an office that oozes success… don’t skimp on a well-thought marketing campaign. A manager unwilling to invest in the growth of firm AUM can adversely affect the perception of the firm as well as its credibility in the LP community. By only considering “non-retained” firms, the manager is expecting a marketer or placement agent to make an exclusive investment in the due diligence and collateral development aspects of the campaign or is just skipping over those aspects altogether. This kind of relationship narrows the playing field to folks with small, resource-challenged teams that may not have the expertise required to complete the front-end work of a successful campaign. The existence of a retainer simply represents an alignment of interests, no different than the one demanded today between the GP and their LPs.
Yep, They Are Out There
While it happens more frequently in the hedge fund world, there are still some placement agents that are willing to take on a project with compensation linked solely to the outcome of a successful fundraising campaign. However, these types of firms rarely dedicate their undivided focus to preparing the kind of due diligence, marketing development, and strategy positioning resources that are critical to the success of an emerging manager. Most often, these are not process-driven firms committed to the long-term success of the fund or manager. This type of marketer generally has a “go-to” group of investors who have shown interest in similar strategies. These marketers are usually short-term focused, seeking an opportunity to simply make introductions between allocators and fund managers, without requiring manager diligence or the build-out of quality marketing material. While these kinds of relationships can be effective, they are usually set up as “non-exclusive” engagements and include a “carved-out” group of potential investors to target. We believe the days of “throw it at the wall and see what sticks” marketing ended with Bernie Madoff.
Unfortunately, these kinds of relationships often seem promising at the beginning, but they end up compromising the time and focus of the firm while creating the wrong first impressions among LPs. If there is no immediate traction in the discussions, these types of arrangements usually end in disappointment for both parties. The manager walks away with nothing to show for the effort, a negative view of marketers, and increased pressure from a rapidly evaporating fundraising timeline.
Overcoming the reputational damage inflicted by a less-than-thoughtful marketing effort is also easier said than done. Once potential investors form an opinion of an opportunity, it can be extraordinarily difficult to get them to change their minds. Following the termination of a marketing engagement over non-performance, fund managers will attempt to re-enter the market via another marketer or on their own accord. Unfortunately, a manager’s enthusiasm will be quickly dashed when targeted investors indicate that they have already reviewed and declined the opportunity. The only way a manager might get in the door a second time is if they have a close connection with the investor.
Invest in the Future
More often than not, the retainer of a third-party marketer is credited against future success fees to allow the marketer to dedicate the time and resources needed to complete the initial work on a successful campaign. With a credit balance against success fees, the real expense of a retainer is a short-lived event, assuming the marketer can actually raise the capital. The amount of LP capital required to offset the retainer is typically minimal; usually far less than $10 million. If either side has doubts on their ability to raise enough capital to get past the break-even point of the relationship, they should probably be taking a hard look at their respective business plans and the probability of any success in working together.
Greatness is Rarely Found Basking in Mediocrity
Do your homework and find a high-quality firm that, like you, is committed to long-term success. That said, the scenario in which a manager could engage a third-party marketer, pay a retainer, and not raise any money is real and happens with relative frequency in the emerging manager space. If a manager has this fear, they should continue to do their homework to identify a marketer that instills the kind of confidence where there is absolutely no concern of exceeding the retainer break-even. Hiring an incapable marketer, at any fee, will end with frustration and often little or no capital raised. However, the real expense lies not in the lost retainer fee, but in lost “time to market” and the reputational damage with investors in the target market.
You're Presenting to Professionals, Don't Sell Like an Amateur
Accredited investors see presentations weekly, so they know when a manager is operating without a well-rehearsed, well-thought distribution strategy. In many cases, investors are left wondering if the manager will run their fund strategy as poorly as they conduct their fundraising campaign. However, for the manager of a first- or second-time fund, investing in a well-thought distribution plan can prove to be the smartest investment a young firm can make. It allows the team to focus on strategy execution while presenting investors with tailor-made marketing and communications capable of reflecting their true edge in the strategy.
If you hire an internal marketer, they will require a base salary + upside. Expect to pay a seasoned internal marketer somewhere between $250,000-$1,000,000 annually. You can expect something similar from a placement agent. While retainers vary, most reputable firms charge between $25,000 -$250,000 annually (some are required up front, while others charge monthly). As it relates to success fees, they are generally about 50 basis points of the first-year management fee, payable quarterly over 1-2 years.
The expense of a retainer lost to an unsuccessful marketer can be overcome, but repairing damaged reputations with LPs can be a very cumbersome, uphill process. Do your homework and always check references. Finding a process-driven team that will dedicate the energy and expertise necessary to prepare your firm to go to market may require more work and expense up front. However, they should end up serving your firm as an outsourced partner committed to helping you achieve your AUM goals, allowing you to remain focused on achieving your ROI goals.