AVCJ – The Merits of Differentiation

Over the last 28 years, independent placement agent Eaton Partners has helped 70 funds raise around $35 billion. Founder Charles Eaton and David love, head of Asia and head of global distribution, reflect on a changing market.

Q: What Is your view on the fundraising environment?
CE: A year ago we saw a pickup in investor interest. We represent managers across the gamut of alternative investment – private equity, real estate, hedge funds and real assets like infrastructure, farmland and timber – and there is strong interest in our current offerings. We have about 15 funds in the marketplace and we should successfully market 4-5 of them from Asia in the next 12 months.
DL: In our last origination meeting, fully half the funds put under consideration were Asian. China is the driver but what we’d like is a portfolio of strategies that David Love represent pan Asia, Indigenous China, and other specific countries and strategies.

Q: What do you look for In a fund?
DL: There are four key factors that we look for. Is there a significant defined market opportunity? Is the strategy differentiated and differentiable? Is there a specific edge for that strategy (and usually it’s the people)? And is there a track record that reflects those other three factors?

Q: Many Asia PE firms have little In the way of a track record…
DL: We have done more first time funds than any other placement agent so we’ve been through track records in a lot of different ways and forms. On one occasion, we worked with a fund that came out of a big institution and we weren’t given access to the track record We used public data and reconstructed 70% of their deals and results – it took us a year but we ended up with a successful raise. Most of the Asian funds we look at now have compelling track records. These may be based on running several renminbi funds or working at a different institution where the record is transportable. It gives us enough substance.

Q: Many Asian GPs, particularly those in China, have been able to raise large funds. At what point does size become a concern?
CE: We look at the deal flow and analyze the size and number of transactions. Most firms try and do 2-4 transactions a year, which means 10-14 over the course of a four-year investment period. If they are at the small end of the market and they are targeting 10 deals at $30 million each, that’s a $300 million fund. You don’t want to see them raise $1 billion. If they are looking at buyouts or infrastructure projects the 10 deals at $150 million would be a $1.5 billion fund. Realistically, they aren’t going to get more than four done a year and do them well if a firm has too much money and they try to push 6-8 deals a year they might struggle.

Q: How have LP attitudes changed in recent years?
DL: LPs are more selective – it’s not the salad days of the pre-GFC. You have to be very careful you have a fund that meets their criteria. The popular areas right now are real assets and Asia. We have a very significant pipeline of various types of Asian funds that will be coming into the market in the next 12 months, including a pan Asia fund, a single strategy functional fund and an Asian fund-of-funds. If you don’t have a fund that is differentiated, you won’t have much success.

Q: With interest in Asia growing, are more LPs looking to go direct rather than through fund-of-funds?
DL: Yes, but you would still be amazed at the calls our distribution people make into major funds in the US and Europe that say they have no Asia representation or interest. That is changing. The allocations into Asia are growing gradually and the knowledge base is expanding and that is what we use as our resource base – the expansion of interest in Asia. You have to be in the weeds on the ground to make intelligent decisions. We have already done the work as their most difficult LP so we add value when the Investor may not have Indigenous presence in the market.

CE: A lot of the public funds don’t have the resources to open an office overseas so they will send investment staff on trips overseas and rely on consultants that do have presence on the ground. Most public funds need to have an endorsement from a consultant to supplement the work that their sometimes limited staff can do on their own.

Q: You have been in this business for a long time. What keeps you going?
CE: If we were stuck in the same job day-after-day for 30 years we might get quite bored. But we come over here, meet with 10 managers in three days and each one has a different story to tell, a different strategy, a different opportunity set and it’s pretty darn exciting.

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