Carlyle to Kick Off $35B Fundraising Burst
By Tom Stabile June 29, 2016
Carlyle Group is expecting a lighter fundraising haul this year before it rolls into a major push starting in late 2017 that should bring in more than $35 billion into seven of its larger funds.
After raising $22.5 billion in gross capital last year, Carlyle started off with just $2.2 billion in new money in the first quarter of 2016, a slower pace stemming from having fewer of its big funds in the market, said CFO Curt Buser in recent comments at a Morgan Stanley analyst conference.
"[Our] major funds have not come to market… in the past two years," he said.
But the successor funds expected to follow its most recent $13 billion U.S. buyout, $4.1 billion European buyout, $3.9 billion Asian buyout, and $4.2 billion U.S. real estate vehicles are right around the corner, Buser said, amid a slate of seven strategies that in the last round raised $35.5 billion. The next period likely would have closings for these funds between 2018 and 2020, he said.
"As U.S. buyout, Europe buyout, Asia buyout hit into end-of-2017 and 2018, [we] fully expect those funds to be larger next go-around, and in doing so, fundraising will be higher," he added. "The market today for this space… is very strong."
Carlyle’s current dry period has mostly to do with its next flagship funds lying in wait, Buser said. Private equity firms tend to space out capital raising in a fund series by several years in order to invest the money from a current vehicle before asking investors to commit to the next round.
But the manager also has faced "idiosyncratic issues" in its private credit, hedge fund, and advisory businesses, Buser said. The hedge fund segment, in particular, saw assets fall over the past two years from $15 billion to $6 billion as it weathered market losses and redemptions. It also closed its $2 billion Diversified Global Asset Management hedge fund of funds unit this year.
Carlyle’s prospects are nevertheless strong for its next round because of continued investor interest in alternatives, Buser said.
"More capital is being deployed to this space, so the macro situation is very good," he said.
Carlyle has several funds in the market today, including a new long-dated private equity vehicle, which brought in $3 billion as of late 2015, and an energy mezzanine debt fund targeting $3 billion. And having a big slate of funds all lined up to raise capital at once is Carlyle’s strategy, said co-CEO David Rubenstein, during a recent Deutsche Bank conference.
"Our… business model has been to have many different funds and to let the investors select which area they want to go into," he said. "Increasingly, though, we’re seeing investors coming and saying, ‘I’ll give you $1 billion or $500 million and I’d like you to help me select which of these funds to go into so I can have a homogenized Carlyle kind of fund of funds.’"
But the manager’s next big push will also follow a period when private equity managers have had several strong years of fundraising, leading some market watchers to posit that the industry pace will begin to slow. And in the past week, concern over the United Kingdom’s vote to exit the European Union has cast a new cloud over global economic growth prospects.
Private equity’s strong run may not be over, but could see capital flowing to particular strategies, including the still-popular middle market buyout sector, says Jeff Davis, a partner at Eaton Partners, a third party marketer.
"We don’t know how ‘Brexit’ will affect all of us – there are a lot of theories and question marks – but for some, the private equity party is still going, specifically in the lower- and middle-market growth, buyout, credit, and special situations markets," he says.
The next few years indeed look promising to Frontier Capital, says Richard Maclean,managing partner at the lower middle market-focused private equity firm, whose fourth fund in 2014 raised $390 million. The manager in Charlotte, N.C., specializes in information technology and software firms, and expects to allocate 80% of that fund’s capital by year’s end, he says.
"For 2017-2018, we’re not sensing any pulling back on re-ups or commitments from our [limited partner] base," he says. "There’s still a trend of culling the number of managers, and more [investors] talk about focusing on their core relationships. You definitely want to be designated as a core relationship."
Carlyle’s upcoming roster includes a likely successor to its $2.4 billion U.S. middle market buyout fund, which had a final close earlier this year.
Managers prepping for new products to hit the market amid a potentially tougher fundraising environment can take various steps to ease their paths, Davis says. A primary effort is launching a more concerted "premarketing" effort prior to the official capital-raising period, he says.
Fund managers should always have an off-cycle relationship management strategy to keep in regular contact with clients via marketing campaigns, client communications, and in-person meetings, a process Davis calls "feeding and caring" for current clients, while keeping prospects "warm and informed." But the premarketing stage – when the manager should be sending clear signals to existing clients and desired prospects about when it will be in the market, and gauging their interest – becomes an even more critical tool for those expecting a tough fundraising market, he says.
"Be more careful about the timing and launch," Davis says. "Make sure that you have tied down your anchor commitments – not just to say ‘they’re coming,’ but to have it committed, signed, and documented, so you can bring that information to other [potential clients]. Those that have momentum can show scarcity – ‘It’s half full, so you’d better get in now.’"
Another tactic is to time a new fund’s launch as much as possible around successful exits of deals from existing funds, Davis says. "If you can wait for two months when you have a fat, juicy realization, you may want to wait and do more premarketing and then have a better track record to show," he says. "There’s no room for sloppiness or false starts, or having too many meetings when your effort is only half-baked, because you can lose credibility."