May 18, 2009
Kudos to Bloomberg to an excellent review of where we are with the placement agent model and the use of the politically connected to make introductions.
– Apparently the well-connected politically – democrats mostly – have spent their time in the wilderness riding the alternative asset boom. This excellent Bloomberg piece documents how a wide variety of Democratic operatives were drawn into the lucrative placement agent/introduction agent model.
– It remains to be seen what is going to be the outcome of all this. There are some tangy quotes from the investment offices desiring the purge of the politically connected non-financial types.
Kramer, the New Jersey investment council chairman, predicted more fallout from the scandal.
“I don’t think the revelations are over,” he said on Bloomberg Television. While some agents “add value,” he said, “we’ve got to find some sort of balance where at least you take the people who are clearly just political finders and knock them out of the business.”
However, I am not sure that there is much more sympathy from the ex-investment banker or sell side analyst that has reinvented himself as a Third Party Marketer or placement agent. It is not as if state or local governments feel more affinity or have a greater degree of confidence that this placement agent spent 10 years at Lehman vs. that placement agent spending 10 years working for the Democratic machine.
The outcome of the inquiry has significant implications for the marketing of alternative investment vehicles. If are a hedge fund /private equity fund, How well do you really know and understand your external marketers. I have a few friends at private equity funds, with public money, that are sweating bullets worrying about drawing the interest of Mr. Cuomo.
If introducing agents are removed from the process – three things will happen 1) it effectively helps the largest firms as brand recognition will create comfort and eliminate avenues for smaller funds to gain acces, 2) more power will be in the hands of the consultant tasked with evaluating different investment products and 3) alternative investment firms will need to investigate other options to gain access to large allocators.
Expect marketing/business development teams to increase and the cost of marketing to increase.
Some closing thoughts….
“When you look at some of who the placement agents are, you say these are people who are really not in the financial business,” said Orin Kramer, who oversees pensions as head of New Jersey’s Investment Council. “These are politically connected intermediaries, and that’s not a way it ought to operate.”