The Carlyle Group LP's funds-of-funds and secondaries business has been shedding executives and investment strategies at a fast clip.
When launched in 2011, the Washington-based alternative investment firm's solutions business unit was supposed to offer discretionary investment services — including secondary market and co-investments — across five asset classes. Today, only two distinct parts remain: the private equity business, AlpInvest, and real estate unit, Metropolitan Real Estate Partners.
Several top Carlyle solutions executives have left or reduced their roles, including Jacques Chappuis. The former Morgan Stanley fund-of-funds executive who joined the unit two years ago to build the business rejoined Morgan Stanley Investment Management in February as a managing director and co-head of the firm's solutions and multiasset group.
At the same time, Carlyle's solutions business can no longer depend on commitments from AlpInvest's former owners — Dutch pension fund managers PGGM and APG — whose five-year promise to commit a combined total of e10 billion (then $13.5 billion) ended in 2015.
So far, Lauren Dillard, a managing director who replaced Mr. Chappuis as head of the business unit, said in an interview PGGM and APG continue to invest on a discretionary basis and are “our most significant investors.” She declined to give the size of the commitments.
Industry executives say Carlyle's struggles with its investment solutions business unit demonstrates how even the largest name-brand alternative investment firms cannot assume their limited partner base will support every product offering. That is especially the case in the investment solutions arena, with stiff competition from consultants, funds-of-funds firms and outsourced chief investment officer firms, which might not have the same perceived conflicts of interest as a manager of primary alternative investment strategies.
OCIO, fund-of-funds firms and others are all trying to solve the same problem, said Jonathan Grabel, chief investment officer of the $14.4 billion New Mexico Public Employees Retirement Association, Santa Fe, which invests in Carlyle private equity and real asset funds, but not with the investment solutions business.
“They are all offering customized asset allocation strategies for plans without the resources to do it themselves,” he said.
In the past six months, Carlyle closed or stopped pursuing separate investment strategies in four asset classes: hedge funds, mezzanine, infrastructure and energy. Carlyle restructured its solutions business in February, shuttering its hedge fund-of-funds business, Diversified Global Asset Management. A month earlier, Justine Gordon, an AlpInvest managing director hired in September 2014 to start the energy and infrastructure secondaries and co-investment business and raise a dedicated fund, departed after Carlyle efforts to raise the fund floundered. In August, AlpInvest stopped raising a $500 million mezzanine fund in favor of focusing on separately managed accounts. Firm officials expected to raise $200 million for mezzanine separate accounts.
The investment solutions unit will have exposure to energy and infrastructure, through its main private equity secondaries strategy managed by AlpInvest, according to a company spokesman.
“By refocusing the investment solutions segment, we are concentrating our efforts on areas where we see real momentum: private market secondaries, co-investment and managed account activities through AlpInvest and Metropolitan,” according to a Carlyle statement issued in February in relation to the DGAM announcement. “We believe with this change we will increase distributable earnings in our investment solutions segment in 2016.”
The solutions group, with $46 billion under management as of Dec. 31, is not out of money. In February Metropolitan closed on $550 million in commitments for its latest fund, above its $450 million target.
“We are finding traction with existing Carlyle LPs and new LPs,” Ms. Dillard said referring to the entire investment solutions business.
The AlpInvest unit of Carlyle's solutions business has more than 50 limited partners, up from its original two when the firm only invested for PGGM and APG, a company spokesman said.
Even with commitments from PGGM, APG and outside investors, the AlpInvest unit plans to raise more capital, and lots of it. The firm expects the AlpInvest division alone to raise around $7 billion in commitments this year, compared to $4.2 billion raised by the last AlpInvest secondaries fund and managed accounts in 2013, sources said. The solutions business closed on $1.6 billion in 2015, according Carlyle's latest 10-K filing with the Securities and Exchange Commission.
At the same time, Carlyle's solutions business has been shedding senior executives, most of whom have gone on to other alternative investment firms.
After Carlyle acquired a majority interest, AlpInvest's board had an equal number of members from AlpInvest and Carlyle. AlpInvest CEO Volkert Doeksen was chairman. Other AlpInvest members were Paul de Klerk, chief financial officer and chief operating officer of AlpInvest; and Tjarko Hektor, director. Mr. Hektor left in April and Mr. Doeksen has reduced his role to vice chairman.