Spent a while trying to get this to work. I am sure it is in the administration guide somewhere but this is what I found.
The Events database connects using SQL authentication so the SQL Server must be configured to use Mixed Mode authentication. I have been testing with SQL express and the first clue were a lot of errors in the application log. To resolve this do the following
Open the Management Studio -> Right Click on the server and select properties. Set the following
Now create a new SQL user and set it to be the Database owner or the Events Database (make sure you deselect the enforce password policy option see this KB for reference http://kb.vmware.com/selfservice/microsites/search.do?language=en_US&cmd=displayKC&externalId=1029537
Providing the SQL server is listening on port 1433 you should now be able to connect