RJ Lumba of GrowthCap speaks with Charlie Eaton, an early pioneer in fund placements, who, over 30 years, built one of the largest global firms in the industry. Eaton Partners was later acquired by Stifel Financial Corp in January of 2016.
After spending time with Charlie, you get the distinct impression of someone who has worked persistently and patiently over many years to get to where he is today. Charlie and I chatted over lunch and subsequent conversation; he shared his experience of building his firm and of the challenges faced along the way. He also offered up some advice for those starting out in private equity and financial services.
RJ: Perhaps we can kick off with your background and how you got your start?
Charlie: I grew up in Ohio, and went to school in Western Pennsylvania. After college, I spent two years in the army as an officer. For graduate school I went to Columbia, and got my MBA. I started out on Wall Street as an analyst for Morgan Guarantee Bank. Three years later, I decided I preferred selling research to institutional investors, asset managers, bank trust departments and investment management firms. At that time, I was working for a research firm called HC Wainwright. When Wainwright and other specialty research firms went out of business I ended up doing sales at a division of Paine Webber. So that’s my background. When I turned 40, I decided I wanted to try to build my own business. So I started out in 1983 with the concept of selling research and investment management. Within five or six years I realized that one can actually create a business supporting money managers, private equity firms, and hedge funds by doing marketing for them. So I expanded my firm in the late 80s and have done the same thing ever since. 33 years later we have become one of the most successful, largest and longest running placement firms in the business. We concentrate only on selling to institutional investors as opposed to high net worth or retail investors.
RJ: At the time you started this business it sounds like you kind of saw an opportunity, were there others doing this or was this still a nascent field?
Charlie: To my knowledge at the time there were only one or two people doing this and they were individuals, not organizations. I really just fell into it myself by being asked by one firm if I thought I could raise money for them. After that first assignment, I found another firm looking for help and within a couple of years I found two more. It was at that time that I discovered I should build a platform. I still wasn’t aware of other firms being created until about maybe 1991, when I learned that Merrill Lynch had created a group to provide similar services.
RJ: How has the business changed over the years? Where is the area that you’re seeing the most growth?
Charlie: In 33 years, as a result of our growth, we have become a global firm with seven offices and 65 people. Over the years, by being opportunistic we’ve taken on different types of private equity and hedge fund managers and strategies. In the past 20 years we’ve raised money for over a 100 different firms. That includes approximately 10-12 categories or strategies. In any given one or two-year period, different investment strategies are more in demand by investors. For example, from ‘06-‘08 we did a lot of infrastructure funds and what we call real assets, including real estate and timber. From 2009 through 2015, we were heavily concentrated on several different energy strategies and clients.
RJ: As you started selecting managers you would take on as clients, were there some key attributes you would look for?
Charlie: Good question, I think that it is a judgment on our part as to whether a certain group, or strategy, or sector might appeal to our prospective investor universe. But specifically, since we’re dealing with institutions, we need a firm that is credible. We have to like the general partners and believe that they will cooperate and work hard. Aside from making the judgment on the strategy and the people, we generally look for a firm to have three to five principles, not just one person with a great track record. We want that team to have worked together, ideally, for three to five years creating a track record that is meaningful. I’d like to have three to five investors that have already committed to the manager because that adds credibility and is very helpful in the selling process, versus having to struggle to find the first couple of investors to step up. And lastly, we would like to be able to raise $300-500 million for the GP.
RJ: There are many in our audience that are starting out in one way or another, maybe they’re on fund one, maybe they’re on fund two or three, but they’re growing and they’re young. Is there one piece of advice that you could give them that you think would be helpful during this early stage of their entrepreneurial journey?
Charlie: Boy! I would caution people starting out to understand that it takes quite a while to achieve meaningful success in the asset management business. One has to be incredibly patient. It will cost more money in the early years than one will likely generate in fees or profits. This is commonly referred to as the J curve. So don’t give up too easily unless it’s been proven that your investment strategy doesn’t work.
RJ: What was the most challenging time you faced when building up Eaton Partners and how did you overcome that challenge?
Charlie: Over 33 years there have been a lot of ups and downs. There are always going to be periods where certain investment strategies work and also periods when they may not work so well. I had a lot of setbacks. I took some chances with some money managers that ended up being dead ends. I had some people join my firm that didn’t work out for whatever reason. Having to finance the growth of the business, adding people and global offices, were expensive investments. Those investments don’t always pay off. But by and large I think the best advice is it takes money to make money. And in our business, it takes substance in people and process in order to be a winner, at least in the institutional world.