The Carlyle Group has established a convenient way for limited partners in its sixth fund to sell their fund stakes, which LPs say could help alleviate concerns about long lock-up periods but also strikes at the heart of the nature of private equity.
Carlyle will allow LPs in Fund VI, which launched earlier this month with a $10 billion target, to sell all or portions of their fund stakes twice a year, according to several people with knowledge of the structure.
Bloomberg first reported on the provision, which it said was included in the firm’s private placement memorandum for Fund VI. Carlyle declined to comment.
“It sounds … innovative. [It’s] probably very attractive to LPs that need liquidity, or are concerned about the long private equity lock-up periods,” said one industry LP. “We're not sure it convinces us to start a new relationship on the mega [fund] side.”
The idea seems to shift away from what private equity is all about, according to some LPs. An investment official at a family office said: “At the heart of private equity is the premise of a long duration investment and if you are generally not comfortable with making a long-term commitment then you probably shouldn’t be playing in private equity. The concept of LPs asking for liquidity windows seems a bit odd.”
To facilitate the programme, Carlyle has lined up five secondary firms to buy fund interests from selling LPs, several sources confirmed. The preferred buyers are Goldman Sachs, Partners Group, Landmark Partners, Coller Capital and Credit Suisse. Carlyle would also buy up a portion of fund interests.
At the heart of private equity is the premise of a long duration investment and if you are generally not comfortable with making a long-term commitment then you probably shouldn't be playing in private equity.
Family office official
Carlyle will price the interests twice a year using the average weighted price of all bids required to meet the supply of available interests, Bloomberg reported. The highest priced bids will be matched first with the available interests to determine the final price, the article said.
The buyers can exit the programme any time and Carlyle can end the programme any time, Bloomberg said.
LPs would not be required to only accept bids from the five preferred buyers, according to a person with knowledge of the programme. If a sixth firm makes the highest bid for a fund interest, a selling LP would be free to accept that bid, the person said.
The secondary firms in the programme had to make primary commitments into Fund VI, several sources said. At least one large secondary firm, AXA Private Equity, declined to participate in the programme because of the primary commitment requirement.
The primary commitment requirement is a way for secondary buyers to show they are dedicated to the firm for the long-term.
“GPs want secondary buyers who will be long-term investors; they also want to deal with a limited number of investors, particularly since secondary buyers have lots of data needs for the models they use for pricing,” said one industry source.
RANGE OF REACTIONS
Industry sources had a wide range of reactions to the idea. From the GP side, the programme was seen as a way for Carlyle to keep control of the secondary process by including secondary firms it has already approved and who presumably have their own knowledge of Carlyle.
This familiarity could cut down on the amount of time Carlyle would have to spend on processing fund transfer requests, a process on which GPs are spending increasing amounts of time as more LPs choose the secondary market as a way to manage their portfolio.
“It makes the secondary process easier on the GP because the groups have been vetted, they already have access to the information so that the whole approving potential purchasers and then providing information to them goes away,” said one fundraising professional at a large private equity firm.
For LPs, the structure offers a path to liquidity for organisations that find themselves in need. Many institutions were caught during the economic downturn in liquidity crises as portfolio values sunk, and their great fear was a sudden inability to meet capital calls from GPs.
The idea of a quick exit should give LPs confidence they can get out if they have to and in turn, should help Carlyle
It sounds like a self-created marketing move. I doubt that LPs, particularly existing LPs that are sophisticated, asked for this.
attract investors into the fund, the IR professional said. Also, the process would allow LPs to bypass the need to hire a firm like Cogent Partners or UBS to run a sales process for their fund interests, according to one source.
However, most of the professionals contacted for this article said LPs have not necessarily been asking GPs for a quick exit out of funds. They viewed the idea as an LP incentive designed to ultimately help the firm raise money.
“It sounds like a self-created marketing move. I doubt that LPs, particularly existing LPs that are sophisticated, asked for this,” said one industry LP.
Sources compared the idea to incentives other firms have used to reach their targets, including BC Partners’ “early bird discounts” on fees for LPs who committed to the fund prior to the first close, and KKR’s establishing a hurdle rate for the first time for its next flagship fund.
“This will help Carlyle stand out from other private equity funds,” said one industry source. “It’s a smart way to position the fund, but not anything of huge importance for big investors.”