LOS ANGELES, Aug. 7, 2018 /PRNewswire/ — Compensation arrangements for private placement agents reflect the reality that agents are professionals and undertake significant time as well as market, contractual and regulatory risk when providing their services. The most common compensation arrangement is a “retainer fee” in order to cover the placement agent’s time and expenses plus a “commission” or “success fee” for introducing capital. A retainer can be structured as an hourly or flat fee but in either case it should reflect the placement agent’s workload, committed resources, subcontracting needs and overall market value. Although retainer fees are not popular in the industry, they serve an important purpose and should not be disregarded. The placement agent often spends numerous hours preparing, reviewing and packaging offering materials prior to the selling phase. This represents time away from the agent’s other revenue undertakings and therefore ought to be compensated. Retainers are negotiable in amount and payout, and often total less than the all-in compensation package paid to an internal marketer over time. Moreover, the retainer sharpens an issuer’s involvement since all of us tend to put less care and attention into things that do not cost us anything. Refusing to pay a retainer may signal that the issuer is not prepared for a professional placement service and should instead continue to raise funds from friends, family and angel investors.
The success fee aligns the agent’s interests with those of the deal sponsor and usually reflects the risk/reward tradeoff inherent in every fundraise: the more difficult to sell the investments, the higher the success fee, and the inverse as well. There are generally two ways to structure the fee–either as a percentage of the introduced capital or, for managed funds, as a percentage of the manager’s revenues generated from that capital. As an alternative, some parties have agreed to provide the placement agent an ownership interest in the manager and/or the fund—this is seen more often when projected revenues from the fund are less likely or far out in time. Other alternatives are warrants or other options in the fund or company. Because a success fee depends on the decisive actions of the placement agent, it is crucial to document clearly what constitutes an investor prospect, how investor prospects will be conducted and what a successful investment looks like. The right place to address these questions is in your agreement with the placement agent, which is executed prior to the start of the agent’s services.
The most common fundraising mistake that early stage managers and companies make is that they are not ready for professional private placement services—usually because their revenues are not yet high enough to afford placement agent services. These managers are better off continuing to tap capital from savings, friends & family and angels.
Using a non-licensed broker to find investors should always be avoided. While it may be convenient in short term, the fund runs a serious risk of violating securities regulations that may trigger contract rescission rights for investors, prohibit future revenues for the manager and taint the manager’s business.
When the issuer attempts to conduct fundraising on his own, it steals precious time away from developing the business strategy; one well-recognized advantage of using an external marketer is the potential cost savings over time against employing an internal IR professional.
Some fundraisers unreasonably favor or neglect certain investor classes—I believe each alternative investment has at least two marketing angles, and possibly more, so it’s very important for the placement agent to cast a wide net after discussing the issuer’s desired investor set.
Lastly, a pivotal, but completely avoidable mistake happens when the placement agent goes out to investors not aligned with the issuer’s vision. The best prevention is a clear understanding of the issuer’s business and prerogatives and then communication to the issuer of regular progress updates during the raise to confirm the direction and course correct as needed.
Jamil French provides capital introduction and financial advisory services on the RainMaker Securities platform. He has been a Wall Street corporate lawyer to hedge and private equity fund sponsors, blue chip companies, investment banks, lending and other institutions. He received an A.B., cum laude, from Princeton University and a J.D. from Harvard Law School where he served as a submissions editor for the Harvard International Law Journal. Institutional Investor Magazine named French a 2018 Hedge Fund “Rising Star.” He is Chairman of the Hedge Fund Association’s Strategic Investor Committee where he educates the hedge fund community about the benefits and challenges of emerging fund managers. French holds Series 7 and 63 securities licenses and is admitted to practice law in New York and before the United States Supreme Court. Jamil French can be reached at firstname.lastname@example.org and at 888.333.1091 x753.
RainMaker Securities, LLC (www.rainmakersecurities.com) member FINRA and SIPC, is a placement agent and merchant banking firm that serves as broker-of-record for the sales transactions between private issuers and the investors. RainMaker is a recognized leader at providing unique and proprietary private equity and debt products to its alternatives investors. In addition to fund products comprising unique private asset classes, they create markets in the shares of a wide variety of late-stage high growth private corporate issuers. RainMaker provides diligence over all clients and investors, compliance and administrative oversight for my business and acts as a sounding board for my clients based on their deep understanding of private markets and alternative investment products. RainMaker’s clients are uniquely positioned to benefit from the firm’s deep investor networks, potential deal collaboration with 50 seasoned representatives, more efficient due diligence and onboarding, streamlined agreements, and fast turnaround times.
Rainmaker Securities, LLC – a registered broker dealer, Member FINRA/SIPC, 11390 West Olympic Blvd., Suite 380 Los Angeles, California 90064. This document does not represent an offer to sell or a solicitation of an offer to buy any security.
SOURCE Rainmaker Securities, LLC
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