AVCJ – The Merits of Differentiation

 

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Asian Venture Capital Journal

Charles Eaton & David Love

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.

WSJ – Private-Equity Slowdown? Not for Yuan Funds – Eaton’s David Love and Eric Gu

 

HONG KONG— Private-equity fund raising in China is  defying a global slowdown, making an already tough market for deals even  more competitive.

Elsewhere in the world, fund raising for  private-equity funds is down considerably from three years ago. But  funds in China denominated in the country’s own currency, known as both  the yuan and the renminbi, are seeing a fund-raising bonanza. So far  this year, such funds have raised US$9.13 billion, making up 77% of all  China-focused private-equity funds raised this year, according to Asia  Private Equity Review. Yuan funds, which raise capital only from Chinese  investors, saw similar success last year, raising US$6.18 billion, or  63% of the amount raised for China private-equity funds. Offshore China  funds target investors outside the country.

Yuan funds aren’t just raising more money than  dollar funds, they’re doing more deals. According to Dealogic,  yuan-denominated private-equity funds have done deals worth at least  US$3.6 billion since the beginning of 2009, while non-yuan funds have  done US$2.8 billion in deals.

Some of the largest funds raised in Asia this year  have been yuan-denominated. Beijing-based Citic Private Equity Funds  Management, part of Citic Securities Co. Ltd., raised a nine-billion  yuan ($1.32 billion) private-equity fund called Mianyang Scientific City  Investment Fund, the largest such fund raised in China so far.

Western firms are doing it as well. U.S. private  equity firm Carlyle Group raised the equivalent of US$350 million for  the first closing of its yuan-denominated private equity fund last month  and is targeting five billion yuan. Another U.S. private-equity firm,  TPG, this month announced not one, but two yuan-denominated funds of  five billion yuan (US$735.5 million) each. Blackstone Group LP also  announced plans to raise a five-billion yuan fund.

Demand for yuan funds is coming from a rising class  of prosperous Chinese investors, as well as Chinese regulations that are  spurring the development of a homegrown private-equity industry.  China’s government sees private equity as a means to channel money into  small and medium-sized enterprises that don’t always have ready access  to bank lending or public markets, says Kathleen Ng, managing director  at the Centre for Private Equity Research in Hong Kong.

Seeing growth in the new market, C.P. Eaton Partners  earlier this year became the first foreign fund-raising agency to  launch a yuan fund-raising platform in China. The firm hired Eric Gu,  who previously worked at the China National Social Security Fund, to  lead the effort from the Eaton’s representative office in Shanghai. “The  [renminbi] market will grow rapidly. . . we want to be involved in this  market,” said David Love, a partner at Eaton.

Mr. Love added that while both Chinese and western  firms have been busy raising funds, Chinese firms seem to be having more  success. “For Western [firms] it’s been very slow,” he said.

Foreign firms see yuan funds as a way to buy  political capital in an important market. Yuan funds also are a means to  avoid arduous regulatory hurdles that can complicate investments from  an offshore private-equity fund. But it’s not clear that  yuan-denominated funds truly get better treatment.

Private-equity firms typically inject some capital  into funds and investments so they have some skin in the game. That  means yuan-denominated funds raised by foreign firms ultimately have  some foreign ownership involved.

“Even such small amounts could bring into question  the funds’ status as a Chinese investor for investment approvals. We  hope that’s not the case but there’s no official pronouncement on this,”  said Ying Zhang, funds formation lawyer at Ropes & Gray LLP.

Dealing with local inexperienced Chinese investors  may also prove tricky, say industry insiders. Not all foreign funds are  jumping onto the yuan fund bandwagon. Some have expressed concerns about  how Chinese investors, who are less familiar with private equity, will  deal with capital calls and years-long commitment. China has a lot of  capital, but not a large group of experienced investors.

In addition, many funds are raising funds with  government bodies, which then want funds invested in a particular  province or industry, these insiders say. Even when there aren’t any  officials restrictions on where or what funds should invest in,  private-equity fund managers have expressed concern about pressure from  powerful government investors. Limited partners in China tend to be more  active than those elsewhere.

CNN Money.com – Hedge funds are making a comeback

 

David Ellis, Staff Writer

After two incredibly turbulent years defined by high-profile blow-ups and staggering losses, the hedge fund industry appears to be expanding once again.

At the end of last year, there were about 6,800 hedge funds in existence, according to industry tracker Hedge Fund Research. That’s down from a little more than 7,600 at the industry’s  peak in 2007.

But new launches outpaced liquidations during the  second half of 2009, according to HFR. Anecdotal evidence seems to suggest that trend will continue.

“We are seeing a significant amount of fund  formation,” said Philippe Teilhard de Chardin, global head of prime brokerage at Newedge, a Paris-based brokerage firm.

In fact, hardly a week goes by these days without  mention of an existing fund company trotting out a new hedge fund  offering or news of some ambitious financier hanging out their own  shingle.

Last month, reports surfaced that activist investor and founder of Pirate Capital Tom Hudson was looking to launch a new hedge fund called Doubloon Capital, which would focus on distressed companies.

Wall Street also sat up and took notice late last  year following news that hedge fund titan John Paulson, who made  billions of dollars betting against the U.S. housing market and big  banks, was launching a fund focused on gold-related investments.

The return of hedge funds shouldn’t come as a major  surprise, analysts said. In many ways, the current environment is ripe  for starting a new hedge fund. With the global economy appearing to be  on the mend, investors have become enamored with riskier assets again,  such as emerging markets and corporate bonds.

Many ambitious financiers are also feeling a little  more entrepreneurial these days after receiving their year-end bonuses,  said Ron Suber, senior partner and head of global sales at the New  York-based prime brokerage firm Merlin Securities.

“They are now somewhat flush with cash from getting  paid from a good 2009 and have decided to strike now while they see  opportunity and liquidity,” said Suber.

Much of the new hedge fund activity however, is simply a function of investor demand.

With financial markets on the upswing again,  high-net worth clients and sovereign wealth funds are slowly starting to  regain their appetite for alternative investments like hedge funds  again.

“For managers who had been sitting on the sidelines  with new offerings in 2009, that means that now may be the right time to  try launching,” said Udi Grofman, a partner in the investment  management practice at law firm Schulte Roth & Zabel.

Still, the barrier to entering the hedge fund world  is perhaps as high as it has ever been, according to experts. Launching a  new hedge fund often requires months of accounting, legal and technical  legwork, not to mention plenty of start-up cash.

“All that takes much longer than it used to than it  did 3, 4, or 5 years ago,” said Grofman. “The world has become a much  more complicated place.”

And then comes the hard part: fundraising.

While some institutional investors have warmed up to  the idea of investing in hedge funds again, they aren’t extending as  much capital as they might have during the pre-crisis days of 2007.

An ambitious hedge fund manager might have been able  to raise $500 million or more back then. Now, even $100 million is a  major achievement, experts said.

“Although new launch activity has picked up  recently, many funds are starting out much smaller than they might have  in 2008,” said Grace Kim, senior vice-president at Connecticut-based  C.P. Eaton Partners, which helps hedge funds raise capital.

“The challenge for them will be to achieve critical mass.”

AVCJ – Merrill’s Boston joins CP Eaton to lead private equity

 

Paul Mackintosh

Asian Venture Capital Journal

Gto AVCJ following the news that he has joined  leading placement agent CP Eaton Partners as an MD and member of the  management committee.

According to CP Eaton, Boston will have “responsibility for leading the firm’s global private equity fundraising business.”

“I joined CP Eaton for the opportunity to be a  partner at a high-quality and global institutional fund raising firm,”  Boston told AVCJ. “Having worked at larger investment banks, I have long  sought to be a part of a focused fundraising business without the  distractions of being within a huge diversified bank.”

Prior to joining Merrill Lynch in 2004, Boston was  MD and Global Head of Citigroup Global Markets’ Private Equity Fund  Group. A frequent visitor to Asia Pacific, he has been associated with  fundraisings for firms such as CVC International, Emerging Capital  Partners, ePlanet Ventures, and Terra Firma Capital Partners.

“All of the senior professionals of CP Eaton have an  ownership stake in the firm, which means that every employee is more  focused on meeting the needs of clients rather than the needs of a  bank’s senior management,” Boston continued. “The timing for joining CP  Eaton seems ideal to me – I expect the fundraising market to strengthen  during the last quarter of 2010, and for 2011 to be a rebounding year.”

CP Eaton claims to have raised over $33 billion to  date for 57 alternative investment funds, and is currently targeting $8  billion for 14 vehicles. Previous reports indicated that Bank of  America, Merrill Lynch’s new owner, was winding down its placement  business, leading to the departures of MDs Michael Ricciardi, Enrique  Cuan and Alan Pardee to form their own placement firm, Mercury Capital  Advisors.

Boston pointed out some of the likely advantages of  Asia Pacific fundraising to AVCJ. “From a short-run perspective, I  expect that Asia Pacific will face the same cyclical issues as the US  and European fundraising markets. However, over the next five to ten  years, the center of gravity in fundraising will increasingly shift  toward Asia – where demographic growth and the flexibility of private  capital will make for more attractive investment opportunities than in  more mature markets. Having lived in Hong Kong and traveled throughout  Asia, I am a believer that the time has come for a greater role for  private equity throughout the region.”

However, he did caution against expecting too early a  rebound. “Limited partners are today being very cautious – as you know,  private equity fundraising tends to lag the public markets by about six  to nine months. If the public markets rebound later this year, as  expected, then in 2011 allocations will improve and distributions to LPs  will increase, providing fresh capital to be recycled into new fund  commitments.”

Additionally, Dave Love, the head of CP Eaton’s Asian strategy, offered this thought:

“LPs globally, including investors in the region,  increasingly recognize that Asia, particularly China, is the key driver  in the global economy. GPs, both offshore and in Asia, clearly are  responding to this in numbers, size and sophistication. We at CP Eaton  see our presence in Asia with an office in Shanghai as a significant  advantage.”

PEI – Placement vet Boston joins CP Eaton

 

David Snow

The former Merrill Lynch head of private equity fund origination says an expected rise in fundraising will benefit his new firm.

Loren Boston has joined placement agency CP Eaton Partners as a managing director, the veteran fundraiser told PrivateEquityOnline today.

In his new role at Rowayton, Connecticut-based CP Eaton, Boston will serve as a member of the firm’s management committee  and will have responsibility for its global private equity fund  placement business.

Boston was previously global head of origination at Merrill Lynch’s fund placement business, once among the most dominant firms in the highly competitive fundraising advisory market. That division was dismantled following Merrill’s acquisition by Bank of America in 2008. The shutdown was indicative of the turmoil in the placement business in the wake of the financial crisis and the resulting  slowdown in private fundraising.

In an interview, Boston said that while “these last few years have been a difficult market. . . a lot of people are  expecting to see an uptick in the equity markets, and if so fundraising  will rise with that”.

Boston went on to say, “Among placement agents, there’s been a complete reorganisation. Today there’s really only one or two investment bank-related players. There’s been a big move in favour of boutiques.”
Boston also chose to move to CP Eaton in part because it now has a  broadly shared ownership structure by which “the alignment of interest  with the GP is much more complete”.

Before joining Merrill Lynch in 2004, Boston was global head of the Private Equity Fund Group at Citigroup Global Markets.

CP Eaton was founded in 1983 by Charles Eaton, who  continues to lead the firm. The firm focuses on raising funds targeting  private equity, real estate, real assets and hedge fund strategies. It  has more than 35 employees in four offices: Rowayton; La Jolla,  California; London and Shanghai. The firm also has a professional  working from an office in Texas.

The firm’s most recent client fund close was Hudson  Clean Energy Partners, which rounded up $1.024 billion in December for a  debut vehicle.

While at Merrill Lynch and Citigroup, Boston and his  team represented many notable fundraisings, including vehicles  sponsored by Terra Firma Capital Partners, Avenue Capital, Avista  Capital Partners, AIG Highstar Capital and Nordic Capital.

ABC News – Wall Street’s Power Surge – C.P. Eaton’s Success with Hudson Clean Energy

 

Goldman Sachs has attracted a long line of critics and conspiracy theorists convinced the Wall Street bank is at the root of many an economic catastrophe.

But after a deadly power plant explosion in Middletown, Conn., involving a company called Kleen Energy, even members of the conspiracy crowd might have been surprised to learn that the natural gas-fueled plant was being built by a private equity fund and that it had been bankrolled by Goldman.

And while no one is suggesting the bank’s involvement underwriting the  nearly $1 billion project would have in any way compromised safety — indeed, the exact cause of the explosion is still under investigation –  the incident does call attention to the ever-growing alignment between a  shifting national energy policy and the Wall Street financiers who hope to profit from the green movement.

In terms of promoting clean energy, greed, for lack of a better word, is good, power industry members said.

“In simple terms, the clean fuel industry  is dead without Wall Street funding,” said Karl Miller, a former Wall  Street banker, power industry executive and energy investor.

Jim Owens a spokesman for the Edison Electric Institute, a trade  association representing investor owned power companies, said that’s because those companies “need capital, a lot of capital.”

“Electric utilities are perhaps the single most capital intensive industry there is,” he said.

Long and Winding  Road

One of more than 80 natural gas turbine projects currently under  construction in the United States, the Kleen Energy plant was just a few  months away from finally generating electricity. It had survived nine  years of political hurdles.

Goldman’s financing, a complex debt issuance sold mainly to European  banks, got done just a few months before the financial market meltdown  of autumn 2008. Kleen, in fact, was to be among the biggest power plants  in the Northeast and the hope was that its becoming operational would  eventually reduce electric bills in Connecticut, which gets most of its  power from out-of-state providers.

Coal-fired power plants are seen as Environmental Enemy No. 1, and the  backlash against them opened the door for the Kleen project and others  like it.

While coal fired plants still produce roughly half of all the kilowatt  hours of electricity consumed in the United States, natural gas, which a  decade ago accounted for just 10 percent of electricity produced, now  accounts for upwards of 20 percent, according to the Edison Electric  Institute. Hydro and alternative sources make up the balance.

With the backlash against carbon emissions only growing, coal-fired power plants could soon be a thing of the past.

Pensions & Investments – After storm, who will be left?

 

Arleen Jacobius

Firms big and small expected to be among list of casualties Pensions & Investments

Venture capital today is survival of the pluckiest.

About three quarters of the estimated 1,500 venture capital firms now in business worldwide aren’t expected to be around after they finish investing their current portfolios.

And those leaving the venture capital arena aren’t only the lesser-known firms. Just last month, Silicon Valley stalwart Draper Fisher Jurvetson Portage Venture Partners executives acknowledged  the firm will close after the existing portfolio is invested.

Still, there are survivors, and even new entrants.  Some venture capital firms managed to close funds in 2009 — a year that had the fewest number of funds raised since 1993 and the lowest amount  of capital since 2003 — while others were able to exit existing investments and make new ones.

Venture capital stalwarts Kleiner Perkins Caufield  & Byers, Greylock Partners, Sequoia Capital and VantagePoint Venture Partners are expected to thrive.

Kleiner Perkins, Greylock and Sequoia invested in  some of the largest venture capital deals of 2009, according to the  MoneyTree Report of PricewaterhouseCoopers and the National Venture  Capital Association.

VantagePoint is an investor in Tesla Motors Inc., which recently filed to go public.

Among others mentioned by industry sources as likely survivors:

• New Enterprise Associates Inc., which closed its  13th fund last year with $2.46 billion, the largest venture capital fund  raised in 2009, according to NVCA and Thomson Reuters data. The fund  has already made 15 investments;
• Sofinnova Partners, which closed its sixth fund with €260 million ($363 million) in capital commitments;
• Northgate Capital Group, which closed the second-largest fund last year, with more than $1 billion in commitments;
• Foundation Capital. which invested — along with  Kleiner Perkins and Northgate — in Silver Spring Networks Inc., a  Redwood City, Calif.-based software firm; and
• Andreessen Horowitz, which in July simultaneously  announced the firm’s formation and the closing of its initial $300  million fund — the largest fund sponsored by a new firm that closed last  year, according to NVCA and Thomson Reuters. The firm, formed by  experienced investors Ben Horowitz and Marc Andreessen, invested $50  million in Skype Ltd. in September.

But for most firms, it will be tough slogging.

Survival depends on name, investment story

Venture capital returns have been challenging for  the past 10 years. During the past two years, the lack of a public  market, especially for smaller companies, and a smaller number of  acquisitions and mergers virtually stopped the flow of distributions to  investors. These days, the average time from initial investment to exit  has grown to well beyond seven years from the previous norm of three to  five years, said David Fann, president of PCG Asset Management LLC, La  Jolla, Calif.

PCG predicts that within five to seven years, the  number of viable venture capital firms worldwide will drop to 500 from  an estimated 1,500 today.

The venture capital industry already has contracted.  NVCA membership dropped 10% in 2009 and association executives expect  membership to decline another 15% in 2010, said Mark Heesen, NVCA  president.

Survival depends, in part, on a recognizable name  and a compelling investment story, industry insiders say. But a name  brand alone is no guarantee.

“Many older venture firms are facing generational  changes. Those `great investors’ that invested in the 1970s and 1980s  are retiring as they don’t want to stick around and commit to another  10-year fund,” Mr. Fann said. “The next-generation venture capitalists  just aren’t as compelling in proving that they could create great  companies.”

NEA Co-founder Dick Kramlich has said he will be stepping down as a  full time partner after the firm’s latest fund is wound down.

Some firms have managed to make the transition  gracefully. Reid Dennis, founder of Institutional Venture Partners,  switched to strategic partner when the firm raised its last fund, $600  million IVP XII, said Todd C. Chaffee, general partner. The five general  partners on the firm’s 12th and latest fund had been with the firm for a  decade.

Mr. Chaffee said the fund, which surpassed the $300 million 11th fund,  was oversubscribed. The firm is hiring new associates and grooming the  next generation of IVP investment executives.

“Venture capital is very much an apprenticeship business,” he said.

Eric W. Wright, partner in the private investment  funds group of law firm Ropes & Gray LLC in San Francisco, said the  historical front-runners might not remain in the lead. Pushing some  older executives to call it quits is the 10-year performance numbers,  which plummeted dramatically now that the 1999/2000 fund vintages are no  longer included to buoy returns, Mr. Wright said.

“Venture capital firms have legacy problems,” said  Stephen L. Nesbitt, CEO of consultant Cliffwater LLC, Marina del Rey,  Calif. “They have a lot of resources tied up with existing portfolio  companies.”

Out of close to 200 funds, only about 50 are doing  well, with only about a dozen venture capital firms doing very well, Mr.  Nesbitt said.

These include well-known large venture capital  franchises as well as small groups that developed very strong brands  with repeatable performance, he said.

Still, Mr. Nesbitt noted whenever an asset class is  declared dead, with few investment dollars going its way, is when the  investments will perform the best.

Competition for money

The NVCA’s Mr. Heesen said many firms that stayed  out of the fundraising market in 2009 will find themselves competing  with other venture capital firms already scheduled to raise money in  2010.

Those that do close funds will be raising much less  capital than before, he said. That would be devastating to the future of  venture capital because the smaller the fund, the fewer investment  executives needed. The younger executives, those in their 20s and 30s,  will be shown the door, he said.

The result is that in 10 years, when firm founders  are nearing 70, there will be no junior executives in the wings to carry  on the firm’s work Mr. Heesen said.

Despite the doom-and-gloom forecast, venture  capital firms still are investing money, noted Peter T. Martenson, La  Jolla, Calif.-based director at placement firm CP Eaton Partners LLC.

“Venture capital firms are raising new  capital for new companies,” he said, but not all of them are doing so by  raising new funds. Pressured by investors to distribute profits, firms  such as Sequoia, 3i Group PLC and Sevin Rosen Funds are selling  portfolio companies on the secondary direct market to other venture  capital firms. Secondary investment firms like Cipio Partners LLC,  Industry Ventures LLC and Saints Capital are doing a booming business  buying portfolio companies from other venture capital firms, Mr.  Martenson said.

“It provides liquidity for venture capital  firms that can’t take companies public, sell them or have too many  companies in their portfolios for too long, he said.

Opalesque Exclusive: Placement agent CP Eaton expects ‘impressive’ hedge fund inflows in 2010 Opalesque

 

Opalesque
February 08, 2010

From the Opalesque team:

In its 2010 outlook,  Connecticut-based, global placement agent CP Eaton Partners expresses optimism about hedge fund industry performance in 2010. With hedge funds  completing an impressive 12-month turnaround that ranged from the  massive redemptions and poor performance of Q109 to record breaking  performance gains and net inflows of investor allocations by Q409, the  firm expects hedge funds to continue to build on this rally in  confidence into 2010.

Investors returning to the  markets have favored more liquid strategies, as well as those that are  transparent and easily understood. This has meant that long/short equity  strategies have seen the bulk of inflows and it is no coincidence that  the majority of new fund launches in 2010 have been equity l/s  strategies. Assets returning to hedge funds in 3Q09 heavily favored  equity l/s strategies, with those managers logging gains of $221bn  (according to BarclayHedge), approximately $64bn ahead of the next most  popular strategy (emerging markets).

The firm is bullish on  fundraising for hedge funds, comparing 2010′s possibilities for  rebuilding the asset base of the industry to 2004′s growth after the  market rebound of 2003. “This year has the potential to be impressive  from a capital-raising standpoint,” says the team.

Funds acquire control through distressed assets, as mezz bounces back

 

Jan. 30, 2010

Funds are increasingly gaining influence over  companies by acquiring distressed assets, according to CP Eaton, a  placement agent that finds institutional investors for asset managers.

“The general consensus is that the opportunity to  make significant gains in liquid trading strategies has passed,” said CP Eaton. “Rather, distressed-for-control remains popular given a wealth  of ongoing market opportunities, and given that control funds resemble  closed-end private equity funds, they are a natural fit for most  investors.”

It is particularly evident in mid-cap companies  (US$200m–$1bn market cap) that are number one or two in their sector, where demand for their product is still strong and that are backed up by  significant assets, for example, machinery or real estate, said Bradi Rodi, a director at CP Eaton.

The trend is one part of a broader return in the popularity of private equity and hedge funds, especially in the US and Asia. Mezzanine is particularly attractive, CP Eaton said, owing to its  diversification, downside protection and attractive returns.

“The demand for mezzanine capital [in the US] is  enormous given the private equity overhang and a wave of debt coming due  soon that will drive a flood of refinancings,” said CP Eaton.

The exit of many from the sector, including hedge  funds and business development companies, has created a shortage of  mezzanine financing to meet demand it believes could total US$400bn over  five years – or double that when refinancings are taken into account.  According to Preqin, an information provider for the alternative  investment industry, today’s demand coming from mezz funds is about  US$21bn.

There is no sign of an end to the supply of  distressed portfolios coming on to the secondary market in the US,  although forced selling has allowed buyers to focus exclusively on  deeply discounted deals, discouraging some sellers, and bid-ask spreads  have also proved prohibitive.

The “residual effects from the credit crisis  continue to apply pressure on [asset] managers to unload non-core  portfolio holdings”, said CP Eaton. It expects 2010 to witness renewed  activity as buyers and sellers align expectations. “A recent industry  study predicts the secondary volume of partnership interests to double  this year compared with 2009,” it said.

Meanwhile, Gamma Finance, a financial boutique  providing alternative investment services and specialising in helping  investors acquire these kinds of portfolios from asset managers looking  to liquidate their positions, is officially up and running, having been  awarded FSA approval.

Gamma was founded by Deutsche Bank’s former head of  structured equity sales for Europe, Florian de Sigy, and Javier  Rodriguez, previously senior strategist and head of strategic accounts  in Barclays Global Investors’ clients’ solutions group.

The firm is looking to exploit the increasing number  of such opportunities that arose from the spike in the imposition of  gates and the creation of side pockets, where illiquid assets are  ring-fenced and locked up until their value rebounds.

“This process has left many investors with the  urgency to reorganise their alternative portfolios, creating several  disposals that are perceived as long-term investment opportunities by  professional investors,” said de Sigy.

The firm’s strategy is to actively analyse such  distressed situations and facilitate introductions with appropriate  investors with matching risk profiles. In this way it distinguishes  itself from the more passive approach taken by the investment banks,  according to Rodriguez.

The firm currently has four employees, with two more  – one analyst and one relationship manager – set to join soon, and with  business coming from Europe, the US and Asia.

Rodriguez acknowledged that the business has come  about because of the excess of distressed or restructured assets  currently in the market, estimated at more than US$10bn, but predicted  an active secondary market in such securities would remain when the  business cycle turned more favourable.

$30 billion raised in real estate funds in 2009

 

Roughly 60 commingled property vehicles closed on commitments last year, raising $30.4 billion – a 66% reduction  from the peak of 2007. More than a third of all funds closed were targeting Europe.

PERE News
Zoe Hughes
Jan. 29, 2010

Real estate fund managers corralled just $30.4 billion of commitments for value-added and opportunistic property vehicles in 2009 – less than a third of the peaks witnessed in 2007.

Data from PERE magazine reveals 57 commingled real estate vehicles held closes last year, with European-focused funds leading the charge.

Of the total amount of capital  raised in 2009, 35 percent was invested in Europe-focused funds,  compared to 26 percent deployed to vehicles targeting the Americas and  17 percent focused on Asia. Among the European funds that closed in 2009  were The Blackstone Group’s €3.1 billion Blackstone Real Estate  Partners Europe III and Orion Capital Management’s €1.28 billion Orion  Europe Real Estate Fund III. Global strategies attracted 22 percent of  all capital commitments.

The figures however are  significantly off the peak of 2007, when $85.2 billion was raised for  value-added and opportunistic strategies. Last year’s fundraising total  even failed to top 2005 levels – when PERE first started collecting data  – when $37.4 billion was raised by GPs.

In the wake of the credit  crisis, large numbers of institutional and individual investors held  back from making new commitments to the asset class as they sought to  evaluate existing investments.

According to a report from placement agent CP Eaton  this week, European real estate limited partners pushed 2009 allocations  into 2010 owing to concern over the “global macroeconomic picture and  capital adequacy ratios”, while in the US only the highest quality,  legacy-free fund sponsors – with a “demonstrated track record of  distressed performance and/or those niche oriented operators” – are able  to raise equity commitments.

More than 200 private equity  real estate funds are currently raising capital globally, according to  the proprietary PERE data, which does not track core, core-plus or debt  vehicles. Sources add there are roughly 90 real estate debt vehicles  currently in market seeking capital in the US.