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Eton Park’s Latin Moves

Nobody can accuse globe-trotting investor Dirk Donath of running with the herd. In 2000, less than a year before Argentina succumbed to a crisis that culminated in the biggest sovereign debt default in history, he co-founded Pegasus Capital, a private equity firm in Buenos Aires.

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Nobody can accuse globe-trotting investor Dirk Donath of running with the herd. In 2000, less than a year before Argentina succumbed to a crisis that culminated in the biggest sovereign debt default in history, he co-founded Pegasus Capital, a private equity firm in Buenos Aires. As Argentina’s peso collapsed, Pegasus, which invests in distressed companies and turnarounds, was able to pick up assets on the cheap. Now Donath, 41, is plying his trade at an accelerated pace for hedge fund Eton Park Capital Management, where he arrived 14 months ago to manage the firm’s illiquid investments in emerging markets. In that time, his group has led ten deals deploying $500 million of the firm’s capital. The latest came in October, when the firm spent $54 million to acquire a 26 percent stake in Transener, an Argentinean electric utility, from Brazilian oil giant Petrobras.

Eton Park, which manages $5.3 billion, is used to making headlines. The firm was founded in 2004 by Eric Mindich, a star trader from Goldman, Sachs & Co. who burst onto the scene a decade earlier at age 27, when he became the youngest partner in that firm’s history. Today, Eton Park is one of a handful of multistrategy hedge funds run by ex-Goldman traders whose principals scour the globe for private equity deals. With offices in New York, London and Hong Kong, the firm has close to 90 employees and also specializes in event-driven, long-short and capital-structure-arbitrage strategies.

Donath has been friends with Mindich since they went to high school together in a suburb of New York City and is well connected in Latin America. Before launching Pegasus, he was a partner at McKinsey & Co., where he ran the management consulting firm’s Latin American consumer goods and corporate finance practices. Donath is also an entrepreneur: In 1995 he founded FarmaCity, a leading retail pharmacy chain in Buenos Aires, where he has strong family ties.

Although private equity investors are known for being deliberate, the frenetic speed of hedge fund investing seems to suit Donath well. “The breadth this platform provides for my activities was a compelling reason to come to Eton Park,” he says, referring to the fund’s global reach and flexible investment mandate.

It didn’t take long for the deals to start flowing. In February, Donath joined two other investor groups to buy Commercial International Bank of Egypt for $231.5 million. In May his firm bought a 20 percent stake in Enron Corp.’s Houston-based holding company, Prisma Energy International, which has an enterprise value of $2.9 billion and controls several major power and gas assets in Latin America and Eastern Europe. In October, Eton Park and a Mexican investor acquired a 60 percent interest in paper products manufacturer Kimberly-Clark de Mexico for $434 million.

Eton Park’s purchase that same month of its Transener stake underscores the contrarian nature of Donath’s deal making. Argentina’s power grid hasn’t attracted any private investment since 2002, when President Nestor Kirchner’s administration refused to permit rate increases or even lay out a clear regulatory plan.

“The power sector is in crisis,” says Gonzalo Arzac, an energy analyst for Moody’s Investors Service in Buenos Aires. Electricity consumption in Argentina reached an all-time high of 17,395 megawatts in July, a 17 percent jump over the same period the previous year. With the peak consumption months still ahead, the power sector is already operating at 94 percent of capacity.

Donath is unshaken. One of the keys to investing in Latin America, he says, is to seek out assets that are tied to the long-term growth prospects of the economy without worrying too much about the short-term ups and downs. “We just think [Transener] has great growth potential given the expansion in the energy network that will accompany the growth of the economy,” he says. “If I were to look back seven to ten years from now, these are exactly the type of assets we would have wanted to be in.”

The Transener deal is under review by the Argentinean government, which Donath hopes will grant regulatory approval by the end of the year.

Ricardo Torres, CEO of Pampa Holding, a Buenos Aires–based energy investment vehicle and Eton Park’s co-investor in the Transener deal, emphasizes the attractive valuation. “The uncertainty around the regulatory environment results in a very big discount on the price of these assets,” he says. Although comparable companies, such as Brazil’s Companhia de Transmissão de Energia Elétrica Paulista, Colombia’s Interconexión Eléctrica and Chile’s Transelec, are valued at $150,000 to $210,000 per kilometer of transmission line, he says, the Transener stakes were purchased for about $40,000 per kilometer.

If Transener reprices to a valuation range similar to other Latin American electric companies, which might take several years (or might not happen at all), Eton Park’s $54 million stake would be worth north of $200 million.

Strong ties to well-connected locals are key to Donath’s deal-making prowess. Pampa is a case in point: It’s an energy investment vehicle run by Buenos Aires–based private equity firm Dolphin Capital. Dolphin’s CEO, Marcelo Mindlin, is a friend of Donath’s and one of the few executives in Argentina with close ties to President Kirchner. In September, Mindlin was part of the presidential entourage that went to New York City to meet with investors and executives in the hope of wooing them back to Argentina.

“There is a very valuable role to be played by the local partner, and Dolphin is a great local partner to have,” says Donath.

Although Eton Park has excelled at keeping good company in Latin America, the firm has had far greater difficulty hanging on to its own executives. In October chief operating officer Stuart Hendel returned to former employer Morgan Stanley. Scott Prince, head of trading and derivatives; Nagi Bedwani, head of European derivatives trading; and Chris Perez, chief risk officer, have also left in the past four months. Donath wouldn’t comment on the departures.

With returns across the hedge fund sector coming in below expectations, some observers are predicting a more somber period. This year through September, Eton Park has returned only about 7 percent. Still, the firm is busy raising about $500 million for additional illiquid private equity investments in emerging markets. It will soon get a read on how investors are feeling about its prospects: The first redemption period in Eton Park’s short history arrives this December.