Carlyle aiming for pan-alternatives outsourcing

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Jacques Chappuis says Carlyle will put capital “where we see the greatest opportunities.”

The Carlyle Group LP is bulking up to capitalize on what it sees as a growing trend — outsourcing alternatives portfolios.

Carlyle Group is the first alternative investment manager to set up a group to invest across multiple asset classes using third-party funds in addition to its own.

Other alternative firms such as The Blackstone Group LP, Apollo Global Management LLC and KKR & Co. LP are investing sizable discretionary separate accounts for institutional investors, also called strategic accounts and separately managed accounts. But Carlyle is the first to span multiple strategies and managers.

Carlyle's offering will be much broader than a typical fund of funds that invests only in third-party funds in a single asset class or strategy. This puts Carlyle at the vanguard of firms invading consultants' turfs.

This one-stop-shop strategy “plays off the trend of outsourcing,” said David Fann, president and CEO of TorreyCove Capital Partners, San Diego, a private equity consulting firm.

“The first wave was outsourced CIO; it is logical that the second wave of outsourcing will be the alternative investments as it requires expertise, access, and a harder to recruit skill set,” Mr. Fann said.

In its new business unit, dubbed Carlyle global solutions, Carlyle executives say they are getting ahead of a wave in which investors will be handing over large chunks of their alternative investments portfolios. Carlyle will have discretion to invest across private equity, real estate and hedge funds — in Carlyle funds and third-party funds. (Carlyle executives would not identify the firms with which they plan to invest.) Coming soon, Carlyle expects to add energy and infrastructure to that mix.

“We are one of the very few asset managers that combines private equity, real estate and hedge fund-of-funds capabilities,” said Jacques Chappuis, managing director and head of Carlyle global solutions in New York. “The advantage (for the client) is to manage a portfolio with a common objective where we have the ability to manage across asset classes.”

Carlyle's dry powder

To build its new solutions group, the Washington-based alternatives investment firm went on a buying spree. Just last month, Carlyle announced it was acquiring Diversified Global Asset Management, a hedge funds-of-funds firm, and closed on its acquisition of Metropolitan Real Estate Equity Management, a real estate funds-of-funds firm, that was announced in September.

“One of the reasons we wanted to have all three capabilities … was to structure a portfolio that is geared to meeting an investor's objectives,” said Mr. Chappuis, who also serves on Carlyle's management and operating committees. ”You have one entity that manages the entirety of the portfolio with a single set of goals.”

And it's not done yet. Carlyle is shopping for energy and infrastructure investment management executives who will build out a real assets unit to be part of AlpInvest Partners, the private equity funds-of-funds firm it acquired two years ago and serves as is the cornerstone of its new group.

Earlier this year, the $28 billion Indiana Public Retirement System, Indianapolis, committed $150 million to Carlyle for an in-state portfolio that will invest across private equity funds, real assets and credit investments.

Not all buying

But not all investors are buying the thesis.

Bob Jacksha, chief investment officer, of the $10.4 billion New Mexico Educational Retirement Board, Santa Fe, said his initial response to the idea of outsourcing a large chunk of the pension fund's alternative investment portfolio is “not interested.”

“We prefer to control asset allocation ourselves,” he said.

The one portfolio in which the pension fund does allow managers wide latitude is global tactical asset allocation, but those investments tend to be more liquid, he noted.

“I do not see us ceding control of strategic asset allocation decisions to outside parties.” Mr. Jacksha said.

One concern would be conflicts of interest, particularly if the firm is investing in its own funds, he said. “Would they be allocating to high-fee funds? Funds that are having a hard time raising capital?” Mr. Jacksha asked, adding that other potential conflicts likely would exist.

Carlyle's offering will be broader than many other firms offering strategic accounts, in that it will be offering more asset classes in a single portfolio. It is most similar to the tactical opportunity accounts of New York-based Blackstone Group, but even there Carlyle is setting itself apart.

Blackstone's tactical opportunity investment vehicles are separate accounts for large institutions to invest across Blackstone's four major investment businesses: real estate, hedge funds, credit and private equity. But to avoid conflicts of interest, Blackstone's tactical opportunity separate accounts only invest in strategies that don't fit Blackstone's other investment vehicles because of size, return thresholds or other restrictive criteria, Stephen A. Schwarzman, founder, chairman, CEO and director of Blackstone, said in a Pensions & Investments interview last year, at around the time the strategy was launched.

Carlyle's fundraising

Blackstone had raised $3.52 billion in commitments for tactical opportunity accounts as of Sept. 30, according to its third-quarter report filed with the SEC.

Some of Blackstone's multiasset class mandates have been relatively narrow. For example, in November, the $160.7 billion New York State Common Retirement Fund, Albany, committed $500 million to a Blackstone tactical opportunities separate account that will focus on alternative credit.

Carlyle, however, is not only investing in its own funds but is also making investments on the secondary markets and in co-investments alongside other managers' funds.

By offering other managers' funds in addition to its own, Carlyle appears to be trying to clear one of the hurdles that has stopped some investors from hiring a single manager for a large portion of their alternative investment portfolios: If investors outsource their entire alternative portfolio to a single general partner, they risk either losing access to a number of other general partners or making the wrong choice, consultants say.

This new outsourcing wave is occurring at a time when managers are seeking more discretion from investors in exchange for lower fees within the strategic account context.

In the alternatives investment world, a lot of different types of offerings are being grouped under the headings of separate accounts or strategic accounts, said Mario Giannini, CEO of alternative investment consulting and money management firm Hamilton Lane Advisors LLC, Bala Cynwyd, Pa.

“Many of the ones that we've seen ... appear to be an umbrella structure to put money in the (general partners') funds, but have the umbrella structure essentially to provide discount pricing,” he said. “The (limited partner) gets a cheaper price and the GP gets larger capital amounts and, often, the ability to 'seed' new products or products that don't otherwise sell as well.”

Discretion to invest across asset classes and segments is a key components of Carlyle's strategy.

“The significant advantage of the model is we can move capital around to where we see the greatest opportunities,” Mr. Chappuis said.

Investors have the final say on the program's design.

“There are several ways to structure the portfolios. Investors can put in parameters … The portfolio can be structured so we have bounds, but a mechanism is set up in case we want to move beyond those bounds,” Mr. Chappuis said.

These portfolios do have their allure. Aside from attractive fee breaks, they give investors exposure to investments that don't fit neatly in their alternative investment categories.

“The thesis for tactical opportunity investment programs is to allow investors to move nimbly across multiple asset classes and exploit opportunities that proprietary trading desks of commercial banks used to invest in, but could no longer, due to the Volcker rule,” TorreyCove's Mr. Fann said.

“Most of these investment opportunities do not directly fit or overlap with their main private equity or real estate fund vehicles.”

While many of the limited partners considering these broad investments are large investors, Mr. Fann said these “one-stop solutions” are best suited for smaller investors with constrained resources and tight investment budgets.

“Properly executed, it should allow the investor to benefit from the best thinking of a firm and respond quickly to mispriced investment opportunities,” Mr. Fann said.

This article originally appeared in the December 23, 2013 print issue as, "Carlyle aiming for pan-alternatives outsourcing".