January 28, 2020
Interviewed by: David Snow
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Navigating a Late-Stage Fundraising Market

Jeff Eaton of placement agent Eaton Partners surveys the private capital fundraising market and explains why GPs need to differentiate themselves in a crowded field

Jeff Eaton of placement agent Eaton Partners surveys the private capital fundraising market and explains why GPs need to differentiate themselves in a crowded field

PRIVCAP TRANSCRIPT “Navigating a Late-Stage Fundraising Market” Jeff Eaton, Eaton Partners: We are in the eighth or ninth year of a bullish fundraising market. We’ve never seen a cycle last that long before, so I would say we’re cautiously optimistic that the market remains bullish. I think realistically we should expect, you know, it to become more difficult. Every year that goes by, we get closer to that inevitable recession we will have again, and we’re seeing investors start to be cautious. Where we’re seeing people interested is in the lower market where I think people still see some value arbitrage, managers that can really take an operational hands-on approach. You know, the evidence shows that emerging managers tend to outperform. There’s increased interest in smaller funds, and that’s where we’re spending a lot of our time. It sounds cliché – but what’s your special sauce? How are you different than the other 5,000 funds out there trying to raise money? So a lot of emphasis on how you’re doing things differently, how you’re doing things better. A lot of that can be proven out in historical numbers and performance. All else being equal, performance being equal, the investors are increasingly probing into what makes you different, what makes you better. So when we work with somebody, we’re really focused on why are you different than the, again, several thousand other buyout funds out there? What are you doing differently? Investors overall are in an interesting situation because the public markets continue to perform. So the denominator effect continues to be very bullish for the private capital markets and alternatives. So how do you continue to put money to work on alternatives in the face of investing it extremely high valuations in some people’s minds? So that’s definitely something weighing on people’s minds. I think the other trend that we’ve seen developing over the last couple of years is just the desire to not have to manage as many relationships as they have had to historically. So there’s a lot of focus on, you know, culling or upgrading your current investor or current GPs relationships, figuring out which ones of those we want to continue with, which ones maybe it’s better to move on… Overall, energy fundraising’s been a challenge the last couple of years. GPs and firms like us have been telling people for a while now that things are cheap. We’re at an [energy] conference today where I had a breakfast with a number of the leading LPs that invested in energy. There’s some reasons to be optimistic. They’re still putting money to work, they’re just being extremely selective about where they do it. They’re rethinking the strategies where they can make money. Another area we’re seeing interest in is come uncorrelated strategies. For instance, music royalties. Very few funds focuses on that. We’re seeing LPs very curious about that. Non-performing loans – that’s another area of interest for a lot of investors. We’ve got a private credit silo now. We’re seeing elevated interest in allocations being created at LPs to funnel money into what they call private credit. About 30%, 40% of our business has been raising money for emerging managers. I believe we’ve closed six, maybe seven in the last 12 months. So I think that’s evidence of there still being significant interest in emerging managers. That being said, I think you’ve got to be able to prove to the investors and communicate why you have a reason to exist. Why are you going be better or do something different than somebody that they’ve been investing in for the last, you know, three or four funds? So we spend a lot of time with managers literally going through every deal they’ve ever done, every deal in their pipeline, trying to figure out what these guys are doing or this group of people doing that is so different from all the other groups out there? That’s the biggest thing. You’ve got to be able to communicate it. The world and the world economy is a much bigger place, so a lot of that vacuum or that delta’s been handled in the private capital markets. More money’s flowing into that space. I would say we’re at an interesting inflection point in the private equity and the evolution of private equity. We’re at a place now where some of the original firms that were founded 20, 25 years ago are having to deal with succession, right? The original founders, the original investment professionals that made the LPs all their money early on are now moving into retirement. Do those firms get succession right? Does somebody even at a firm that’s gotten it right decide, “Hey, I want to own my own firm.” That trend will continue, and I think the LPs appreciate that. I don’t want to say some of these more established firms aren’t hungry, because I believe they are, but investors like the thought of backing the entrepreneur, getting in early, having some influence, being a true partner. I think that trend will continue.

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