Journal of Financial Services Research

, Volume 48, Issue 3, pp 263–287 | Cite as

Costliness of Placement Agents



In this paper, we provide original evidence on the economic role of placement agents as the financial intermediaries between general and limited partners in private equity. Our research is based on 902 private equity funds raised over the period of 1990 to 2011. This data shows that general partners hire placement agents to provide funding for approximately one tenth of the private equity funds they manage. The multitude of services provided by placement agents adds value to both general as well as limited partners. We find a positive impact from the placement agent’s relative fees on a fund’s performance. Similar to other financial intermediaries, the costliness of the placement agent decreases with the investment amounts committed by the limited partners. The fee levels are determined by negotiations with a general partner as well as by the phenomenon of free riding. Further, we find that placement agents do not take advantage of the heterogeneity of the fund’s returns and the potentially high benefits of successful investment picks. Namely, they predominantly prefer to charge their clients fixed fees. We conclude from our findings that limited partners succeed in picking better performing funds because they invest relatively higher amounts of their available allocations of private equity into the funds that yield higher returns.


Financial intermediation Placement agent compensation Private equity 

JEL Classification




We thank Ludovic Phalippou, David K. Musto, Gregory-Allen Russell, Paul Calluzzo, Janis Berzins, Jonathan Moore and the anonymous reviewers of this journal. We also thank the discussants in the research seminar at University of Ljubljana Faculty of Economics, the 25th Australasian Finance & Banking Conference, and the 2013 Midwest Finance Association Annual Meeting for valuable comments and suggestions about how to improve our work. All mistakes remain ours.


  1. Bloomberg 15 March (2011) CalPERS says middlemen were paid $180 million to win investment business. URL: []
  2. Brown JS, Goetzman WN, Liang B (2004) Fees on fees in funds of funds. J Invest Manag 2(4):39–56Google Scholar
  3. Californian legislation, Assembly Bill 1743 (AB 1743) Amended 8 February 2010. URL:[]
  4. Chung JW, Sensoy B, Stern L, Weisbach M (2012) Pay for performance from future fund flows: the case of private equity. Rev Financ Stud 25(11):3259–3304CrossRefGoogle Scholar
  5. Conner A (2005) The economic value of terms and conditions: what is worth fighting for? J Priv Equity 8(3):64–72MathSciNetCrossRefGoogle Scholar
  6. Disdale G (2009) Private equity fees and terms. Ref: 2009-EU-00022 Watson Wyatt LimitedGoogle Scholar
  7. Fenn GW, Liang N, Prowse S (1997) The private equity market: an overview. Financ Mark Inst Instr 6(4):1–106CrossRefGoogle Scholar
  8. Fortress Group 20 April (2011) URL: []
  9. Gompers P, Lerner J (1996) The use of covenants: an empirical analysis of venture partnership agreements. J Law Econ 39(2):463–498CrossRefGoogle Scholar
  10. Gompers P, Lerner J (1999) An analysis of compensation in the US venture capital partnership. J Financ Econ 51(1):3–44CrossRefGoogle Scholar
  11. Guliner M (2008) Capital raising—placement agents. Young venture capital society—visionaries. The young venture capital society newsletter 01/05/2008,
  12. Hochberg YV, Ljungqvist A, Vissing-Jorgensen A (2014) Informational hold-up and performance persistence in venture capital. Rev Financ Stud 27(1):102–152CrossRefGoogle Scholar
  13. Ibbotson RG, Chen P, Zhu KX (2011) The ABCs of hedge funds: alphas, betas, and costs. Financ Anal J 67(1):15–25CrossRefGoogle Scholar
  14. Institutional Limited Partners Association (ILPA) (2011) Private equity principles 20Google Scholar
  15. Kaplan SN, Schoar A (2005) Private equity performance: returns, persistence and capital flows. J Financ 60:1791–1823CrossRefGoogle Scholar
  16. Kaplan SN, Strömberg P (2008) Leveraged buyouts and private equity (no. w14207). National Bureau of Economic ResearchGoogle Scholar
  17. Lerner J, Schoar A, Wongsunwai W (2007) Smart institutions, foolish choices: the limited partner performance puzzle. J Financ 62:731–764CrossRefGoogle Scholar
  18. Levy H, Lazarovich-Porat E (1995) Signaling theory and risk perception: an experimental study. J Econ Bus 47(1):39–56CrossRefGoogle Scholar
  19. Liang B (2004) Alternative investments: CTAs, hedge funds, and funds-of-funds. J Invest Manag 2(4):76–93Google Scholar
  20. Los Angeles Times 15 January (2010) Top earners among intermediaries dealing with CalPERS. URL: []
  21. Los Angeles Times 8 July (2011) Fraud case against Alfred Villalobos is revived. URL: []
  22. Mathonet PY, Meyer T (2007)J-curve exposure: managing a portfolio of venture capital and private equity funds. Wiley Finance, ChichesterGoogle Scholar
  23. Metrick A, Yasuda A (2010) Economics of private equity funds. Rev Financ Stud 23(6):2303–2341CrossRefGoogle Scholar
  24. Metrick A, Yasuda A (2011) Venture capital and other private equity: a survey. Euro Financ Manag 17(4):619–654CrossRefGoogle Scholar
  25. Mills L (2005) The new road. Real deals #(#): 19–24Google Scholar
  26. NY DailyNews 24 April (2009) Records link city pension middlemen to pay-to-play probe of $122 billion state pension fund. URL: []
  27. Perenews 15 January (2010) Real estate managers reveal placement agent fees. URL: []
  28. Phalippou, L (2007) Investing in private equity funds: a survey. CFA Institute Literature Survey SeriesGoogle Scholar
  29. Phalippou L (2009) Beware of venturing into private equity. J Econ Perspect 23(1):147–166CrossRefGoogle Scholar
  30. Private Equity Insider 21 October (2009) URL: []
  31. Robinson DT, Sensoy BA (2013) Do private equity fund managers earn their fees? Compensation, ownership, and cash flow performance. Rev Financ Stud 26(11):2760–2797CrossRefGoogle Scholar
  32. Schäfer D 6 November (2011) Fund investors seek change in fee structure Financial Times URL:[]
  33. Seeteboun H-M(2006) The pattern of power escalation between managers and investors in private equity funds. Working paperGoogle Scholar
  34. Strategic Capital Management AG (SCM) (2009) Annual review of terms and conditions URL: []
  35. Swensen DF (2000) Pioneering portfolio management: an unconventional approach to institutional investment. Simon & Schuster. Free Press, New YorkGoogle Scholar
  36. US Securities and Exchange Commission, Litigation Release No. 21001 15 April (2009) URL: [http://www.secgov/litigation/litreleases/2009/lr21001.htm]

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.PricewaterhouseCoopersLjubljanaSlovenia
  2. 2.Faculty of EconomicsUniversity of LjubljanaLjubljanaSlovenia

Personalised recommendations