Preqin Special Report: Key Due Diligence Considerations for Private Equity Investors; featuring guest contributor, Eaton’s Peter Martenson

Preqin Special Report July 2014 (PDF)

A Placement Agent’s Perspective

– Peter T. Martenson, Partner, Eaton Partners

In such a crowded fundraising market, what advice would you give to investors in identifying a potentially successful fund manager?

From a quantitative perspective, we seek to identify managers with top quartile track records they achieved by implementing the very same strategy and investment process that they will be using in the future. We also do a deep analysis to evaluate how exactly a fund manager achieved these top quartile results. We ask whether the performance came from just buying at the right time or did the firm work to increase revenue and EBITDA through organic operational value or acquisitions, from deleveraging, and from achieving an increased valuation multiple in realization. This analysis gives us a perspective on whether the firm’s results are proprietary and sustainable going forward. From a qualitative perspective, we look for a cohesive team operating under a fully developed platform within a strategy and/or space that has clear barriers to entry as well as a macro tailwind to support implementation of the manager’s strategy. By building up a portfolio of such fund managers while selectively pruning where appropriate and adding new managers, investors should be able to build a portfolio of managers well positioned for outperformance.

With a lack of firm track record, how can an investor determine which first-time funds are likely to achieve a successful fundraise and go on to manage a strongly performing vehicle?

A number of funds that we help raise could be considered the proverbial “first-time fund.” However, we look to bring to market first-time fund managers with teams that are cohesive in some manner having worked together on previous platforms, with clear attribution for a track record to the team aligned with the strategy being proposed, and of course a strategy that appears to be well positioned for the current market environment. If these general tenets are followed and combined with economic terms to properly incentivize the manager and align their interests with the fund investors, you can have a truly outstanding fund. In fact, it is interesting to note that recent academic studies appear to point to the outperformance of first-time funds on behalf of investors as the fund managers focus on hitting the ball out of the park.

What are the most vital things investors should look for when conducting due diligence on a potential investment?

In addition to what I mentioned above, investors need to focus on the macroeconomic fundamentals of the space that the fund manager is pursuing as these fundamental drivers will have a significant impact on how the fund manager performs relative to peers in a similar space. In short, your fund manager needs to have a tailwind. As we sometimes hear more astute fund investors opine, they would rather have a second quartile fund manager in a really well performing market space, such as energy, rather than a top quartile performer in a poor performing market space. Another area investors need to focus on is the downside scenario. Investors need to ask themselves what can go wrong in a fund. You can expect something will always go wrong, not only from the fund level investment in general but also from the portfolio company level. It is also important to determine how a firm or fund platform mitigates the potential people issues that can arise when something goes wrong. The same should be done with the potential downside at the portfolio company investment level. Finally, we encourage fund investors to look at investing with a fund manager in a long-term perspective as a multi-fund investment, such as for the next three fund cycles, so as to capture both the macroeconomic opportunity underlying the fund manager’s strategy but also the fund manager opportunity for sustained outperformance.

How can an investor ensure access to top-tier funds likely to be in high demand with fellow investing institutions?

Many fund investors have rotated into a stance of proactively identifying outperforming fund managers from publicly available sources, such as Preqin Investor Network, or through personal referrals. However, we find that while proactive identification is useful for fund investors, the most significant mistake investors in an oversubscribed fund make is not completing their diligence work in a timely manner. Many investors take a wait and see approach to investing in funds – they want to see the first close or a first transaction in a fund. In some cases potential investors want to be in the final close, if not the last investor in the fund. While this is understandable from a risk perspective, it may result in investors getting shut out of fast moving, oversubscribed funds. So, my recommendation for investors that desire to gain access to potentially oversubscribed funds is to be proactive, to do their work quickly and step up early with an indication of interest. Funds are looking for good partners who want to be investors for the long term.


Founded in 1983, Eaton Partners is one of the oldest and largest fund placement agents in the world, having raised more than $57bn across 80 highly differentiated funds. With over 55 professionals across offices in North America, Europe and Asia, the firm raises institutional capital for investment managers across a full range of alternative strategies.


Partners, LLC, is a Registered Broker-Dealer and a member of FINRA (, and is also registered as an Introducing Broker with the Commodity Futures Trading Commission and member of the National Futures Association(NFA) and SIPC ( Eaton Partners (UK) LLP is authorized and regulated by the Financial Conduct Authority (FCA). Eaton Partners Advisors (HK) Limited is approved as a Type 1 License company under the Securities and FuturesCommission (SFC) in Hong Kong. Eaton Partners and the eaton partners logo are trademarks of Eaton Partners, LLC, a limited liability company ® Eaton Partners, LLC, 2014.



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