Different Levels of Placement Agents, Part 2

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The third tier

At the next level is a group of regional investment banks Dain Rauscher, U.S. Bancorp Piper Jaffray, Adams, Harkness & Hill, Robinson-Humphrey, Friedman Billings Ramsey, and First Albany, to name just a few East Coast and Midwest members. The regionals may act as placement agents at a relatively early stage, but, again, with prosperity, many have moved to what you might call a better neighborhood. In other words, they have a high cutoff in the level of financing and the maturity of the issuers they're willing to consider.

The regionals enjoy one critical element in the fundraising process when you think of angel investors: They almost always have a retail brokerage capacity a slew of retail brokers residing throughout the region who are in contact with potential customers. However, not many retail brokers are willing to introduce a high-risk opportunity to a valuable customer. In the event of failure, the broker could lose the customer. And the commission on a $2 million or $3 million private placement is usually not enough to light up a big broker's eyes.

In many instances, retail brokerage networks are not so much interested in "writing tickets," as it's called, as they are in introducing customers with assets to the financial institution employing them asset gathering. The economics of the business being what it is particularly on the brokerage side because commissions have shrunk growing the amount of assets under management (where an annual fee can be charged for little work) is a higher priority than struggling through an early stage financing. Don't overlook retail brokers and investment banks, however. If the deal is attractive enough, retail brokers cover a lot of ground.

Here's a checklist of things to remember about third-tier placement agents:

They work with local companies.
They have funding minimums of $5 million (more or less).
They understand the local markets.
They can be as picky as the major-leaguers.

The fourth tier

The fourth tier is composed of so-called boutiques. A typical boutique is a collection of experienced investment bankers who have left their major-league firms to strike out on their own, usually in a loose alliance with other individuals of like persuasion.

Boutiques attempt to do all the interesting things that their former employers did. With prominent exceptions, they like to be involved in advisory work for mergers and acquisitions work, and often consider themselves advisors rather than bankers. They don't ordinarily maintain true brokerage functions, and they don't write tickets, nor are they members of the New York Stock Exchange.

Boutiques like to arrange private institutional financings for mature companies, in some cases public companies, but they don't have the capital or the inclination to join in syndicates underwriting public offerings. They also do occasional private placements at the early stage level, depending on the market. Obviously, a robust market is more attractive than a stingy and skeptical one, particularly if a boutique is considering, say, a $3 million to $5 million private placement.

Boutiques ordinarily have low overhead. Each partner is, in effect, a one-man band, without an entourage of assistants. They tend not to locate in the highest-rent districts in the city. When the engagement is appropriate, however, they can be effective.

Here's a checklist of things to remember about boutiques:

They'll work with any company within the field of expertise of one of their partners.
They require no particular funding minimum, but $3 million is about as low as most of them will go.
They're open for business for early stage firms.
They can't manufacture investors out of whole cloth. If a deal is too early for a placement agent, it's too early for a placement agent, period.

Some so-called boutiques are groups of curious individuals who have little aptitude for fundraising but nonetheless publicize themselves as successful intermediaries. They apparently exist on retainers, with little hope of earning the remainder of the fee for a successful transaction.

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