Q&A: Jeff Eaton Talks Capital Raising, CalPERS And The Secondaries Market

Oct 14 2014 | 10:16am ET

Global placement agent Eaton Partners has raised close to $60 billion for some of the largest private equity and hedge fund firms in the world. In fact, 30-year-old Rowayton, Conn.-based firm got its start raising institutional capital for one of the legends of the hedge fund industry: Julian Robertson's Tiger Management.

In April of this year, Eaton acquired a secondary advisory group and will now assist clients wishing to buy or sell limited partnership interests. To find out more about Eaton's business—both old and new—FINalternatives' Mary Campbell spoke recently to Jeff Eaton, son of the firm’s founder Charlie Eaton, partner and global head of origination.

What criteria do you use to choose the funds you work with?

We are extremely selective about who we choose to work with...Over the last 12 months, we've looked at over 900 different fund opportunities across our four silos [private equity, real assets, real estate and hedge funds]...and we work with between 12-15 new mandates a year. The funnel's pretty wide at the top, it's pretty narrow at the bottom.

First and foremost, we don't just work with anybody, we only take on funds that we think we can successfully raise, so there's a lot of different criteria that we look at, everything from track record to attractiveness and differentiation of the strategy, to the people on the team that are executing the strategy, to the market opportunity, to the history of the organization—all those things factor into whether or not we think a product can be sold to the institutional market.

How much of a track record do you require? Do you fundraise for emerging managers?

We've been very successful raising a number of emerging, first-time managers—in fact, we just closed a first time private equity fund focused on the oil field services industry called Turnbridge Capital Partners, which closed in less than six months...

A few years ago, when we were still coming out of the global financial crisis, those emerging manager/first time funds would have had a very difficult time raising money. Risk appetite is coming back and we're seeing that in the form of more first-time fund and more emerging managers being raised.

As far as the track record we would need to see, there are no hard rules, but we generally look for managers that have three to five years of a track record, ideally working together, but it's not required. We can look outside the box if we think that the strategy is overly compelling or a very smart investor has endorsed the manager, which implies that they've gotten comfortable with a shorter track record.

How would you characterize the current fundraising environment?

The top line would indicate that fundraising is quite robust right now. If you look at the dollars raised, for instance, year over year, 2014 should be a very good year. That being said, investors are very selective and, as the headline market seems strong, that brings out a lot of people who think they can raise funds so it's a very crowded market; there are a lot of different people focused on raising money for different strategies. Our view is, while the market's strong, investors are as discerning as ever and so only the best funds will ultimately be able to raise capital.

What are institutional investors interested in?

We are seeing interest across a variety of strategies...Strategies focused on real assets, which includes energy and commodities and other strategies that are underpinned by hard, tangible assets, remain in favor. People feel that with all of the easy Fed money that it's a matter of time before we potentially have inflation, so getting long strategies that are tied to hard, tangible assets is something that's attractive to institutional investors. With that, special situation and distressed strategies within private equity are also gaining interest.

We've also seen money come back into real estate. People are now moving out on the risk curve a little bit and they're looking more at opportunistic real estate investments. In terms of buyout strategies, I think investors are getting more specific in where they place their bets; in other words, they're looking for managers who have specialties or focus on either certain geographies or certain types of assets.

We do believe that the large brand name funds who have established track records of good performance are going to continue to be able to raise money successfully but we also believe that there's a trend towards more specialized, smaller fund...managers that are focused on segments of the market that are under the radar screen of some of the larger managers.

As for hedge funds, while some have cited CalPERS' divesting of their $4 billion hedge fund portfolio as indicative of a larger market trend, I would disagree. We continue to see allocations to hedge funds for most limited partners increase and institutional investors seem more willing to back less established, more niche focused managers than we’ve seen in recent years. Managers still need to meet a high bar of scrutiny and a long list of criteria, so we’re not saying it’s easy to raise money out there, but with the right strategy, a good track record, and the right positioning to the market the probability of successfully raising capital has increased. 

What is the significance of CalPERS decision to get out of hedge funds?

It's always significant when one of the largest and most well known institutional investors decides to get out of investing in an asset class, so obviously that caught people's attention. I don't believe that will be a trend. I think there are very smart institutions out there who see different opportunities in the market and a lot of those are done through hedge fund structures. CalPERS had a particular issue because, unless they committed significantly more capital to hedge funds, they did not have the scale to actually take advantage of the differentiated return streams that hedge funds offer. Obviously, CalPERS continues to have a very robust allocation to private equity. 

Eaton Partners has recently entered the secondaries market, can you tell me what opportunity you see there?

We're really excited about being in the secondaries business now, something we'd considered getting into for several years and we just needed to find the right team to do it. We believe that, as institutional investors become more sophisticated and their portfolios become more mature, they're going to increasingly look to optimize their portfolios by potentially selling LP interests they have in funds and also perhaps buying LP interests in funds that are later into their lifecycle. A lot of these funds are long-life funds with long-liquidity lockups and if you can get in and out of those funds more easily, which you can do through the secondary market, then it's just another tool in their toolbox for optimizing their portfolio. We believe that secondary transaction volume will continue to increase—it's increased dramatically over the last several years and we think that trend will continue. We view it as a tool for GPs as well because they can raise new primary money around a secondary transaction.

We've written a lot about the expected demise of the fund of funds, do you think multi-manager vehicles have a future?

I think fund of funds still play a vital role, especially for limited partners who don't have the resources or ability to build out large, robust teams. Effectively, they're outsourcing those investment decisions to a third party that has a deeper bench and more infrastructure to make those decisions. Funds of funds are also in demand for large and complicated geographies like Asia where identifying the best managers can be difficult. So I think funds of funds will continue to be important, I just think you'll probably see a shakeout over time, but the best performing ones and those that can differentiate themselves from the rest of the pack based on strategy or approach will continue to attract money.

In Depth

PAAMCO: Will Inflation Deflate the Asset Bubble?

Jan 30 2018 | 9:49pm ET

As the U.S. shifts from monetary stimulus to fiscal stimulus, market pricing should...


CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Boost Hedge Fund Marketing ROI By Raising Your ROO

Feb 14 2018 | 9:57pm ET

Tasked with delivering returns on client capital, a common dilemma for many alternative...