Why did True North Real Estate Fund III pay a $5 million placement agent fee?
The business of placement agents, or firms acting as intermediaries between firms seeking to raise capital and potential investors, is one that has been marked by noteworthy scandals. Kentucky, New York, California, and other states conducted bribery investigations surrounding their use in high profile cases. The SEC proposed banning their use, and New York, Illinois and New Mexico eventually did so. Of more general concern, pension funds frequently do not get value from using placement agents, according to one prominent analysis.
True North Management Group engaged placement agent Atlantic-Pacific Capital for help raising True North Real Estate Fund III. True North’s reliance on placement agents for its third fund is nothing new; the firm has used placement agents to solicit 91 percent of total capital it has raised since inception in 2004.
But after over a year of fundraising and $5.8 million in fees paid to Atlantic-Pacific, True North Real Estate Fund III closed with $548 million, over $100 million short of its $650 million goal. Real Estate Fund III was also propped up by real estate investment consultant RV Kuhns, whose clients accounted for at least $300 million of the $548 million raised for the fund
A variety of factors may have contributed to True North’s fundraising challenges. In September 2014 an investor noted about True North Real Estate Fund II (the predecessor fund to Real Estate Fund III) that “[w]hile Fund II has exhibited strong absolute performance to date, conservative leverage utilization (Fund II is 32% levered) relative to its peers has contributed to second quartile performance by multiple of invested capital and fourth by current IRR standards” (emphasis added). And SEC filings reveal that True North related persons committed only 1% of capital raised for Fund II and Fund III, while a Preqin survey found that 63% of private equity funds raised in 2013 and 2014 featured a general partner commitment of higher than or equal to 2%.