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Asia specific – How The Carlyle Group is catering for Asia’s new appetite for PE investments

As investors scramble to build their private equity allocations, PE groups are responding in kind in a bid to meet demand. Developing new products, however, is no easy task. If it is done in a vacuum, without genuine investor interest, or if a fund is developed too quickly, such that the manager is unable to deliver on the investment promise, the outcome is often bad. 

Which is precisely why the largest PE groups avoid such pitfalls. 

One of the biggest and most successful, in terms of fund raising and exceptional multi-year performance is The Carlyle Group. Leading its fund raising efforts is Managing Director and Head of Investor Relations, Michael W Arpey (pictured). “We have to believe we can deliver top performance to investors and there has to be sufficient market appetite; if those two factors overlap, that’s when we move to develop a new product,” Arpey tells Private Equity Wire from the firm’s Washington DC office.

Arpey has been with The Carlyle Group since 2010 and has seen LP interest, across the globe, continually build in private equity. 

“I would say the biggest trend is the rising number of new global investor entrants who have gained interest in private equity and alternative investments as a general matter; SWFs, Asian institutional investors, international public pension plans etc. Those trends are really quite substantial,” he says. 

This broader LP adoption – especially in Asia – has enabled The Carlyle Group to excel in its fundraising efforts. Back in 2016, Carlyle co-founder David Rubenstein set a USD100 billion multi-year target and as Bloomberg reported in June, co-CEO Glenn Youngkin expects Carlyle to have raised around USD110 billion by year-end, thus surpassing Rubenstein’s goal. 

According to Carlyle’s third quarter 2019 financial results, it raised USD5.7 billion in Q3 2019, and has, over the last 12 months, raised USD23.2 billion, bringing total firm-wide AUM to USD221.8 billion. 

Arpey is not that surprised by the continued appetite among LPs. Reason one, he says, is investors are looking for alpha in their portfolios. They see the historic outsized returns that PE has generated, relative to public markets. 

Reason two is that PE is a wonderful asset:liability matching tool. Investors look at their long-term obligations and the lifecycle of PE funds matches up extremely well. 

Reason three is that while it has some correlation to public markets, PE funds are multi-year investments and a way to hedge against public market volatility. 

“You put all those factors together and it is not surprising that investors have been favouring PE over recent years,” says Arpey.

“Schroders’ third annual institutional investor study found that 52 per cent of global investors plan to increase allocations to private assets over the next three years. Within that, private equity is the asset class that those institutions plan to increase their allocations to the most. 

“Research indicates this is an asset class that is expected to continue to grow.”

Carlyle has an extensive global footprint and has, over the decades, build an unrivalled network of operating partners to create value for its investors.

Today it boasts more than 2,600 investors from 94 countries. Specifically, its corporate private equity platform consists of 36 buyout and growth capital funds with USD84 billion in AUM. 

When it comes to developing new products, Arpey believes a “portfolio view” of fundraising is necessary, so as to avoid overweighting Carlyle’s resources in any one geography. After all, LP interests ebb and flow over the years. 

Arpey says: “A big trend we see in private equity is the growth of the Asian investor. We believe you have to be local in Asian countries. It’s a huge continent. We have teams in China, Japan, Korea, Australia, India and so on. You have to have people in those geographies to appropriately cover the region. It’s important to be close to your clients, speak the same language and know what’s going on with them on a real-time basis.”

Also, as the investor mix continues to diversify, large PE groups are paying particular attention to ensure those investors can consume PE content in different ways; a HNW individual or single family office will have a different set of expectations to a public pension plan.

“It’s not just the content that we are solving for at The Carlyle Group, it is also the delivery mechanism: how that content is going to be consumed by the end investor,” comments Arpey. 

“What we try to do is develop thought leadership that smaller investors find interesting from a content standpoint, and to present it in a highly consumable way.” 

He says that as the market has become more mature and sophisticated, it is critical to have great investment acumen. “We try to make our senior teams accessible to our investors to make sure they are receiving high touch information, thought leadership etc, from us. Our investors want substance.” 

When asked how LP expectations are changing, Arpey points out that the very largest institutional investors continue to be very active in co-investment and co-sponsorship. “They have a real thirst for wanting to deploy capital in ways that average down their costs. 

“I see less direct investing (sponsor-less deals) and more investors wanting to be active co-sponsors; they’re not waiting until the deal is secured by the sponsor, they are working side by side with them, submitting an LOI and sharing the transaction costs.” 

Not to say there aren’t instances of investors doing deals on their own but often there is a big difference between aspiration and execution.

When it comes to bringing new investors on board, Arpey is unequivocal when he says the most important consideration is that they bring a long-term mindset.

“We don’t encourage anybody to participate in this asset class if they are going to be market timers,” says Arpey. “It’s very hard to predict fund vintages, cycles and such like. If someone comes into the market, we encourage them to stay the course, to ride cycles and participate along the way to get the real benefit of being a PE investor.”

Portfolios of PE investments where investors exit when markets get frothy, they decide not to allocate for years and come back again are, in Arpey’s view, “the ones with the worst performance”. “The last thing we want to do is help someone into a problem. We want to have investors we can work with over the long term.” 

Reflects on what he enjoys most about his role, Arpey remarks that fundraising is a team sport involving investor relations’ teams, lawyers and senior leadership. “We succeed in fundraising at Carlyle because the whole firm is committed to excellence in how we build meaningful relationships with our investors,” he says. “We never lose sight of the fact that teachers, government workers, hard-working families, colleges and universities, are counting on us to deliver. It’s about making sure we are serving them well, as well as our shareholders and employees, to make sure we have a strong and vital firm for the next 50 years.”

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