Interview: Carlyle's Arpey on LPs, industry image

Carlyle managing director Michael Arpey, who oversees the firm’s new fund formation and global investor relations team, sat down with sister title PEI to talk about the current fundraising environment, retail investors and limited partner concerns. Below is an edited excerpt of the conversation:

How much capital flowing into Carlyle funds is coming from retail investors compared to five years ago?  

Arpey: We are raising more money from retail than we did five years ago. To be frank, we’ve had such strong institutional demand for our products over the last couple of years that we’ve had to be very thoughtful about the amount of retail money we take for each fund.

How demanding are investors during the fund raising process?    

In a post-Madoff world, there is a real premium on the written due diligence process – I would almost describe it as an arms race that goes on with questionnaires. Consultants and sophisticated investors are duking it out to see who can prepare the longest and most thorough questionnaires. Someone actually has to fill those forms out and that’s intensive and a firm-wide effort.

What’s your view on having a standardized LP agreement?  

There’s no evidence that the market will get more efficient with standardized terms and conditions. Every investor has different needs, and terms evolve. It’s just the reality of how it’s done and I would argue this is how it needs to be done. This is a long term investment. You have to determine up front what could happen during the investment period during the life of the fund while negotiating [terms]. I don’t know that you can capture that in a form.

What’s the biggest concern you’re hearing from investors?  

The biggest concern quite honestly is that of investors being the victim of their own success. Because they’ve been getting distributions back so quickly it’s really about maintaining their target allocation. You’ve got the large public pension plans consolidating relationships and writing bigger cheques. Pockets of capital in Asia, Latin America and the Middle East have come online that didn’t exist five years ago, and they’re trying to ramp up their exposure to the asset class. You have high net worth individuals who are now looking [at alternatives] in a world where you have very low fixed income returns and where you’ve got a somewhat volatile public equity market. Alternative asset allocations have become increasingly important. More people recognize that and are trying to rush in.

Do you think there is a populist slant in the US against private equity?  

Fiduciaries are accountable to school teachers, bus drivers and public employees. These are the people who want to know if they’re getting the benefit of a bargain. Some of [the fee debate] is complicated. Carried interest only gets paid when the returns have been good enough to warrant it. You can ask “would you rather earn a five percent return having paid a lower fee or a 10 percent return paying a higher fee?” I think I would take the 10 percent return.