Carlyle Group is retreating from a corner of the Chinese real estate market as the firm's new leadership refocuses its strategy.
The alternative asset manager plans to spin out its China-focused real estate team by the end of the year amid waning investor appetite for a country-dedicated property fund, Brooke Coburn, deputy chief investment officer of Carlyle's real assets segment, said in an interview.
"We discovered a nuance when it comes to investors and traditional funds in the Chinese market," he said. "Investors want to be more prescriptive on terms including the timing of the exit or pursue either smaller transactions or deals that require shared control."
This nuance appears to be specific to offshore managers, according to data from Preqin. The New Jersey Division of Investment, Canada Pension Plan Investment Board and the New Hampshire Retirement System have all invested in Chinese real estate funds, but as a point of difference, these have been managed by Asia-based firms such as GLP, CapitaLand and Citic Capital, respectively.
Carlyle began raising capital in 2016 for Carlyle China Realty, targeting $500 million, according to data compiled by Bloomberg. But by mid-2017, after gathering some $120 million, the Washington-based firm stopped seeking capital for the fund because it had discovered outsize interest for separately managed accounts as a way to invest in Chinese real estate.
Kewsong Lee and Glenn Youngkin, who took the reins at Carlyle in January as co-CEOs, have overhauled the firm's Asian unit and created an integrated platform — led by Xiang-Dong Yang — that invests across buyout, growth, real estate and local currency deals. "This one-team approach is extremely effective and has been well-received by the market, and our platform is firing on all cylinders," Mr. Lee said.
"Our co-CEOs are focused on allocating strategic resources to businesses that generate the most opportunity," Mr. Coburn added.
The change comes months after Carlyle parted ways with senior property executives including Jason Lee, its head of Asia real estate, following a decision to narrow its focus to China.
Before launching the China-focused fund, Carlyle managed $500 million for the National Pension Service of Korea that was earmarked for China real estate deals and was set to invest another $500 million for that investor until this past spring, when it hit the pause button. The firm says it has never lost money on an investment in Chinese real estate and delivered annualized returns of between 15% and 18%, before fees.
Carlyle's retreat from investing in Chinese real estate through a typical fund structure is different than its exit from the hedge fund business.
"When we have a team or a strategy that has not performed, we get out of that business and turn off the lights, but this is a different scenario," Mr. Coburn said.
Once spun off, the team — led by Han Chen — will continue to oversee the investments made by Carlyle China Realty and the firm's managed accounts until they're sold.
Carlyle, which along with its executives have roughly $50 million invested across that fund and a logistics business it has backed, will retain control over decision-making, reporting and compliance of its existing assets. But Mr. Chen's team can raise third-party capital and pursue deals without Carlyle's involvement.
After the spinoff, Carlyle will only be investing in Asian real estate through Carlyle Asia Partners V, its main buyout fund for the region. Real estate-related deals pursued by that fund are likely to include companies that operate hotels or logistics businesses, rather than single-asset deals that are favored by Carlyle's real estate funds in North America and Europe.
In contrast, rivals such as KKR & Co. and Blackstone Group have been expanding their presence in the region. Blackstone in March raised $7.1 billion, besting its previous $5 billion record for the biggest-ever dedicated Asian property fund. And in May, KKR's Asia head Ming Lu said there's a "wide-ranging need for financing and restructuring solutions for properties across the region" in a statement announcing the hire of a new head of real estate in the Asia-Pacific.