The Create Geodatabase Connection fails when passing an instance parameter containing escape characters. For instance, passing 'nomsqapp4d\nomsqapp4d' fails because the '\n' is interpreted inside the arcpy tool code as a new line. This can be verified by calling the function via Python and through running the tool itself in ArcGIS Desktop.
Note that the example instance name is a standard company format and can't be changed. Is there any way around this issue or should this be logged as a bug?