Carlyle Said to Seek $5 Billion for Fund With Longer Life

By Sabrina Willmer and Devin Banerjee  

Carlyle Group LP is gathering as much as $5 billion for a fund that can hold stakes in companies for as long as 20 years, joining private equity firms such as Blackstone Group LP (BX) and CVC Capital Partners Ltd. in seeking more permanent capital from investors.
The firm expects to make investments that don’t fit within the mandate of Carlyle’s sixth main buyout fund, which raised $13 billion last year, said three people with knowledge of the matter, who asked not to be named because the information is private. Investments could include taking minority stakes in companies and backing family-owned businesses, the people said. The fund would charge lower fees than its traditional buyout offering, they said.
Randall Whitestone, a spokesman for Washington-based Carlyle, declined to comment on the plans.
Carlyle, the world’s second-biggest manager of alternative investments, is
joining competitors in planning a new type of buyout vehicle with smaller fees and an extended term, reflecting the growing influence of clients in crafting investment offerings that benefit them. Carlyle, like many of its peers, has cut some fees over its history and shared a larger portion of other levies, such as transaction and monitoring fees, with clients.

Photographer: Matthew Staver/Bloomberg

Investors in private equity funds, known as limited partners, need to reset return... Read More

“Before the great recession, there was a relatively standard way that we structured these funds, as the industry did,” Carlyle co-founder David Rubenstein said Nov. 10 at a meeting of the Securities Industry and Financial Markets Association in New York. “After the great recession, a lot of investors said we want to bargain with you and said we would like to change the fee structure. We have changed.”

Resetting Expectations

Investors in private equity funds, known as limited partners, need to reset return expectations, Rubenstein has said over the past two years. For private equity firms, achieving the returns they produced decades ago is the biggest challenge, he said at the SIFMA meeting.
“In the old world, we used to try to get net IRRs of about 21 to 23 percent,” Rubenstein said, referring to internal rates of return after fees. “In the early days, when there wasn’t much competition, prices were much lower and there was much more leverage. Today you should probably expect 15 to 17 percent for a good buyout fund.”
The median return for buyout funds that started investing after 2002 has been below 20 percent, according to Preqin Ltd., a research firm based in London. The return topped 20 percent in four of the 13 years prior to that, Preqin data show.

Returns Decline

The trend is reflected at the largest private equity firms. Blackstone’s highest-returning buyout funds are those that started investing in 2002 and 1993. Carlyle’s 1994 private equity fund returned 25 percent a year, compared with net IRRs in the low-teens in its two most recent fully invested pools. KKR & Co. (KKR)’s five earliest funds, started from 1976 to 1986, produced annual returns from 26 percent to 39 percent, according to regulatory filings.
Blackstone, the biggest alternative-asset manager, expects to seek money for a similar strategy. The New York-based firm is discussing with some of its largest institutional clients whether they want to commit billions of dollars to make investments that Blackstone would manage for a term longer than 10 years, a person familiar with the matter said. The fees would be lower than those levied for a typical buyout fund, the person said.
The firm would gather the money while also raising its next buyout fund, which is targeting about $16 billion.

Lower Fees

“Private equity firms are finding it harder to go back on the road and constantly fundraise,” Reena Aggarwal, a professor of finance at Georgetown University who researches the industry, said in an interview. “I certainly see why they would prefer this longer-term structure.”
Carlyle is planning to charge a 1 percent management fee and take 15 percent of the profits, known as the carried interest, on the longer-life fund, according to the people. The firm’s latest buyout fund charges as much as a 1.5 percent management, depending on an the amount clients invest, and a 20 percent carried interest, according to a marketing document, a copy of which was obtained by Bloomberg News.
A typical private equity fund locks up money for 10 years, subject to extensions. The longer-term funds would use less leverage, which typically results in lower returns.
“Some investors might see an advantage where a private equity firm isn’t restricted to get out of companies that will continue to enjoy high growth,” Aggarwal said, citing Chinese e-commerce company Alibaba Group Holding Ltd. (BABA) as an example.

Yield Search

Buyout firms might face a tough sell as the offerings promise lower returns with less liquidity. Typically, investors are willing to lock up their money because private equity offers stronger returns than more liquid strategies.
“The 10 year-plus lock-up will be very difficult for most investors to commit to, unless the fee structure is really attractive,” said Jeffrey Meeker, a managing director at Hamilton Lane Advisors LLC, a private-markets asset-management firm.
A longer fund life could be appealing for some clients who are searching for yield in an environment where interest rates remain at historical lows. When buyout funds exit companies, investors are forced to find a place to invest those distributions, which could end up in a lower-yielding asset.
“The longer lives on these funds removes the need to re-deploy capital frequently,” Meeker said.