Institutional Investors Concerned about the Impact of the SEC Proposal IA-2910 and the Possible Partial Banning of the Use of Placement Agents

by Helen Kenyon

  • 01 Sep 2009
  • PE

Preqin spoke to 50 prominent US institutional investors in private equity to ask them about their reaction to the SEC’s proposed rule release IA-2910 and, in particular, to ascertain the response of these investors to the banning of the use of placement agents, and other third-party marketers, in soliciting capital commitments from public pension funds and other public investors in the US.

Of those investors that were aware of the proposal, 83% supported the overall aim of the proposal, which is to place restrictions on investment advisors that make political contributions in an effort to eradicate “pay to play” practices and to reduce the potential for corruption and conflicts of interest in the fundraising process for alternative investment funds. However, a considerable 70% of the investors that were aware of the report spoke out in support of placement agents, and told us they were against the proposed ban. Furthermore, 60% of the investors we spoke to overall, and 50% of public investors specifically, had invested in at least one private equity fund that had approached them via a placement agent.

The institutional investors we polled also felt that it is the smaller private equity firms that would most suffer from the partial banning of placement agents. Though just 15% of investors felt placement agents were important for larger private equity firms when fundraising, 77% felt placement agents were very important for smaller firms. In fact, 70% of the investors we surveyed felt that the proposal would benefit larger firms, and none felt it would benefit smaller firms.

Investors frequently told us they find placement agents a valuable source of leads and market intelligence, with some reasoning that they add an initial layer of screening to the overall fund evaluation process that, though not essential for the effective running of a private equity investment program, is certainly beneficial to the overall process. The majority of investors were in favour of greater transparency and disclosure by GPs of the relationships they have with third-party placement agents. Although demanding such transparency from GPs and avoiding the potential for managers to circumvent these regulations will be challenging, it is clear from our survey of investors that a complete ban on the use of placement agents by fund managers when approaching public funds is itself going to cause significant, and in most cases unnecessary, disruption to the industry and this aspect of the proposal fails to obtain support from most of the prominent investors in private equity that we spoke to.

The complete findings from our investor survey can be found in our research report.

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