Despite NSA spying uproar, investors are loyal to Carlyle

Updated with correction

Carlyle Group's fifth buyout fund is again under attack, this time following the stunning revelation that Edward J. Snowden, a former employee of Carlyle portfolio company Booz Allen Hamilton Inc., leaked National Security Agency documents showing the NSA is spying on American citizens.

But after 25 years, investors with Carlyle — a legend in the private equity world — remain loyal and unflappable. There's been no buzz, no big sell-off of Fund V on the secondary markets. And, Carlyle Group's sixth fund is on its way to closing this summer, after about a year on the fundraising road.

To be sure, there are a few big investors less than enchanted with the Washington-based firm.

The $259.8 billion California Public Employees' Retirement System, Sacramento, sold off 20% of its $1 billion limited partnership interest in Carlyle Partners V LP last year and this month sold its 4% stake in the now-public Carlyle Group. It also has not yet made a commitment to Carlyle's sixth buyout fund, despite being an investor in about 25 Carlyle funds, including four earlier buyout funds.

Shedding its stake in the Carlyle Group was not a strategic decision, said CalPERS spokesman Joe DeAnda, and does not reflect a “lack of confidence in Carlyle or private equity in general.”

CalPERS is not the only pension fund to shy from Carlyle's sixth fund, despite hefty fee concessions to all investors. Others include the $167.2 billion California State Teachers Retirement System, West Sacramento, and the $95.1 billion New York State Teachers' Retirement System, Albany.

“I don't believe the recent issues surrounding Booz Allen will have any influence on limited partner interest in Carlyle,” said David Fann, president and CEO of private equity consulting firm TorreyCove Capital Partners LLC, San Diego. “While it's tough to predict fundraising success in this environment, Carlyle has the benefit of a loyal following who had made attractive returns on past investment offerings dating back over 25 years.”

Likewise, there has been no race to sell off limited partnership interests of Carlyle's fifth fund on the secondary market, said Peter McGrath, president at Toronto-based private equity secondaries advisory firm Setter Capital Inc.

Carlyle's fifth buyout fund has had a pretty ragged history. A 2007 vintage fund raised just before the global economic meltdown, Carlyle held onto its capital commitments, investing just 15% in the first two years but then boosting spending big time, with 60% spent from 2010 to 2012, according to recent board of investments agenda materials from the Los Angeles County Employees' Retirement Association, Pasadena, Calif. The $42.5 billion pension fund, a longtime Carlyle Group investor, committed $150 million to Carlyle Partners VI LP.

Booz Allen Hamilton is not the only problem child in Carlyle's fifth buyout fund's portfolio. Others include Los Angeles money manager, TCW Group and DuPont Performance Coatings. Carlyle's buyout of TCW was a long, drawn-out process. In order to close the deal, Carlyle gave up incentive and management fees from EIG Global Energy Partners' future funds totaling an estimated $7 billion; EIG, formerly TCW's energy group, still runs a joint fund with TCW and objected to the buyout by Carlyle. DuPont's transaction also was a bit of a headache, with Carlyle having to take on $250 million in unfunded defined benefit plan liabilities to close the deal.

So far, Carlyle Partners V has produced a net internal rate of return of 13% and a multiple of 1.5 times investment, placing it at the Thomson Venture Economics' median IRR of 11%.

Investors contacted by Pensions & Investments declined to discuss the issues surrounding Booz Allen Hamilton or Carlyle Partners V's other holdings.

“As a practical matter, CalSTRS does not make subjective comments about its individual managers or holdings,” Ricardo Duran, CalSTRS spokesman, said in an e-mailed response to questions. “Furthermore, CalSTRS does not comment on possible future investment activity it may or may not be considering.” Mr. Duran also declined to explain why CalSTRS has not invested in Carlyle Partners VI.

“I think Carlyle has the same issues other big buyout funds have: They're big,” said Mario Giannini, CEO of alternative investment consulting and money management firm Hamilton Lane, Bala Cynwyd, Pa. “Their prior fund does suffer from the vintage year and investors understand that.”

Indeed, despite the issues in the fifth fund, Carlyle has managed to get a good crop of investors in its newest buyout fund. In addition to LACERA, institutions signing up for Fund VI include the $127.5 billion New York City Retirement Systems, committing $330 million to the fund and the side-car fund; $39.6 billion Illinois Teachers' Retirement System, Springfield, with a $250 million commitment; $162.3 billion Florida State Board of Administration, Tallahassee, committing $200 million; the $48.1 billion Michigan Retirement Systems, Lansing, committing $175 million; the $20.7 billion Texas County & District Retirement System, Austin, committing $75 million; and the $13.1 billion New Mexico Public Employees Retirement System, Santa Fe, committing $40 million.

Christopher Ullman, Carlyle spokesman, noted investors keep coming back, with a large number investing in multiple funds because of high returns and the firm's investment model, which breaks out funds into specific regions and sectors.

Carlyle already has closed on $6.1 billion for Fund VI, with another $3.4 billion expected to come in at the fund's next close. Carlyle executives expect to hold a final close in late summer, collecting between $10 billion and $12 billion in total commitments. (Carlyle executives are committing $700 million, with as much as $200 million coming from Carlyle's balance sheet.)

Meanwhile, the blended rate of Carlyle's management fees on its newest fund is slightly more than Fund V, sources said. Management fees during the five-year commitment period of Fund VI are 1.5% of aggregate commitments from what in the past was the standard of 2% for commitments up to $100 million; 1.3% for commitments greater than $100 million but less than $250 million; 1.2% of commitments between $250 million and $500 million; and 1.1% for commitments of $500 million or more. After the commitment period, management fees drop to 0.75% of aggregate commitments.