C.P. Eaton Partners: New opportunities as market excesses unwind

In its 2008 Global Fundraising Outlook, leading alternative investment placement agent C.P. Eaton Partners says institutional investors are seeking new alternatives in the light of market turbulence and a tougher credit environment.

US: repricing of risk ends easy money era but creates opportunities for traditional managers

The commercial mortgage-backed securities and securitisation velocity that drove transaction activity, capital availability and increased asset values across private equity and real estate in 2005-07 has largely shut down. We now see the re-emergence of the balance sheet lender, lower loan to value ratios, the return of mezzanine to the 65-80 per cent tranche, and far more equity required from deal sponsors.

Current yield strategies (infrastructure, real assets) continue to draw interest from limited partners as turbulence in broad equity markets and the perceived lower return environment for traditional private equity has investors looking elsewhere for returns. With historically low interest rates and high inflation, with Treasuries and the Fed Funds rate below real inflation rates, owning real assets such as rail cars, shipping terminals, gas pipelines, timber and other inflation indexed assets continues to be an attractive investment opportunity. Furthermore, the availability of sophisticated financial structures and private equity-style management are allowing for mid-to-high teen return profiles in a traditionally overlooked asset class.

Distressed investing in real estate and corporate debt markets is becoming more relevant as we unwind some excesses from nearly five years of loose credit standards. Funds that thrive in this environment require workout experience, the ability to access capital markets themselves or via portfolio companies, and a renewed focus on business operations rather than relying on high leverage and cap rate compression to generate return.

Europe: real estate and infrastructure in the ascendancy, private equity under pressure

Large cap buyouts will come under increasing scrutiny from investors as managers struggle to complete investments and the exit environment weakens due to limited availability of debt finance. Diminishing returns, problem portfolio companies and a general economic slowdown may lead to further public scrutiny and negative headlines. Europe will also see a rise in the activity of distressed debt and turnaround players as US groups migrate to Europe.

The infrastructure market is becoming increasingly competitive both for fundraising and for deals, with many 'brownfield' funds struggling to differentiate themselves at the lower end of the return spectrum. Investors will begin to segment the market in a similar fashion to real estate - core, core plus, value add, opportunistic - with most investor appetite focused on higher returning strategies. More managers will seek to raise listed and evergreen structures as an alternative to closed-ended limited partnerships, especially among the more core-focused managers.

EU real estate managers will continue to benefit from capital flows from the US and the Middle East as investors continue to divert funds from the US into Europe. Other US investors may follow CalPERS' lead in opening European offices, and there will be a significant growth in the number of real estate managers servicing third-party clients. Both single manager funds and funds of funds will benefit, with perhaps the largest growth seen in the number of local teams focused on a narrow geography.

Asia: emerging as key component of global investment landscape

Due to continued robust economic growth, there is a strong and increasing investor appetite for Asian private equity and real estate offerings. In order to have a presence in the same time zone as Asian general partners, more and more global investors are setting up Asian offices. This in turn creates a more institutional quality market and fosters more transparency and better governance.

More competition in the GP field will occur in this region with the fast maturing financial marketplace and continued flow of capital. One of the largest impediments today is the lack of financial intermediaries to move investment opportunities through the investment life cycle. Additionally, many GPs are setting up renminbi-based funds to encourage local private investment as an alternative to the highly valued public markets.

Asian LPs are catching up with their western peers and becoming more engaged in global alternative investment. Japan-based LPs have traditionally invested in western mega funds, especially those with Japanese offices. Recently, they are setting up funds of funds to allocate alternative investments into Asia ex-Japan. They are also looking at special situation in the US and EU funds due to the sub-prime crisis. Some global funds of funds are looking to attract LPs from China and Japan.

Founded in 1983 with headquarters in Rowayton, Connecticut, and offices in La Jolla, California, London and Shanghai, C.P. Eaton Partners is one of the world's most experienced placement agents, with more than USD28bn in total capital raised for investment managers across the full range of alternative strategies.

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