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Carlyle scoops up capital from sovereign funds, wealthy individuals

Sovereign wealth funds and high net worth individuals have become increasingly important to The Carlyle Group’s fundraising success, David Rubenstein, the firm’s co-founder and co-CEO, said during the second quarter earnings call Wednesday.

While sovereign wealth funds, wealthy individuals and even fund of funds have become more significant, U.S. public pensions represented less of the capital Carlyle raised in the second quarter, Rubenstein said.

These investors helped drive Carlyle’s fundraising across strategies in the second quarter to $7.4 billion, and $23.1 billion in the last 12 months, the firm reported Wednesday.

“The two biggest trends that I think are worth noting are more and more high net worth individuals…are coming in either through feeder funds or other ways into alternative investments. And secondly, the growth of the sovereign wealth funds is hard to overstate. They have so much money and they don’t pay it out, unlike U.S. pensions,” Rubenstein said.

Carlyle saw a reduction in the amount of capital coming from public pensions in the second quarter, Rubenstein said. “Historically, Carlyle gets about 30 percent of our money from public pension funds in the U.S. In the last quarter, we got about 20 percent of our money there so…U.S. public pension funds in the last quarter, at least, were less significant for us.”

Sovereign funds bring their own characteristics as limited partners, including a desire for more tailored services than strictly a traditional LP role.

“Historically, all investors got the same terms. Now, if you’re bigger, you get a discount. Typically, if you come in early, you get a discount. A lot of those sovereign wealth funds or other large investors now want to come in earlier and get a discount,” Rubenstein said.

GPs have offered discounts for LPs that come into funds in the early part of the fundraising for a few years, though many of the better performing shops have found less need to offer these types of incentives in today’s environment.

However, some funds in the market continue to offer incentives, especially to attract in anchor LPs or investors willing to write huge checks. Incentives include straight-forward terms like discounts on management fees, to more “creative” ideas such as charging fees for early closers only on invested capital, rather than committed capital, sources have told me in past interviews.

“Some say they won’t draw fees for a certain period of time from anchor LPs as well as just charging on invested,” said a consultant source. “They tend to be brands that have difficulty raising capital. Some are spinouts. I wouldn’t say this has been more common than in the past but it certainly has been increasingly creative.”

Interestingly, some investors are content with investment products that produce “steady,” but not necessarily “high” returns, Rubenstein said.

Getting 25 or 30 percent rate of return is “honestly less appealing to people now than having a steady…rate of return over a longer period of time,” Rubenstein said. Because of that, Carlyle is seeing more appetite for “more steady products and a lot of current income kind of products,” he said.

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