Carlyle-AlpInvest Hook-up Would Set Stage For IPO

An acquisition of funds-of-funds manager AlpInvest Partners N.V. by The Carlyle Group would make the latter more attractive to investors if the firm goes public next year as is widely expected.

A source familiar with the deal talks confirmed to Buyouts on Dec. 23 that the Washington, D.C.-based firms is in talks to buy the Dutch manager of private equity investments and has been for some time. AlpInvest is one of the largest investors in private equity funds, investing around $5.2 billion annually in large buyout, mid-market, venture capital, and other fund strategies. The company has about $52.4 billion under management.

The deal would greatly diversify Carlyle’s business, providing it with more predictable revenue from management fees. “What supports the value of this is the fee income, not so much direct investments in the underlying funds themselves,” said Colin Blaydon, director of the Center for Private Equity at the Tuck School of Business at Dartmouth College. The acquisition could be announced in the first quarter, according to our source. Bloomberg first reported the story.

Should it go public with AlpInvest in its portfolio, Carlyle would join The Blackstone Group and Kohlberg Kravis Roberts & Co. in an elite group of publicly-traded, bulge-bracket private equity firms with multiple asset management lines.

AlpInvest’s portfolio of private equity fund investments includes mid-market funds managed by the likes of Catterton Partners, GTCR Golder Rauner and Sentinel Capital Partners. It also includes some larger funds managed by firms that play in the same large deal market as Carlyle, such as Bain Capital, Blackstone, Hellman & Friedman and KKR. The deal would thus put Carlyle in the position of being an indirect investor in more than 100 private equity funds, including some managed by its competitors.

Conceivably, those equity positions could give Carlyle insight into its rivals’ plans. But the source who confirmed the deal talks suggested the firm would implement some sort of firewall structure to prevent conflicts of interest. “Establishing methods to avoid conflicts is standard practice on Wall Street and would certainly be employed here,” he said.

An executive at a firm whose LP base includes AlpInvest told Buyouts he and his partners have had a few informal discussions about the Carlyle-AlpInvest deal, as they did when Blackstone bought debt investor GSO Capital Partners. He said they wouldn’t be concerned knowing that Carlyle is an owner of the company. “For LPs in the fund, we share confidential information with them, but I’m not sure it’s information that would be competitively damaging to us, even if Carlyle did get to it.”

This firm would, however, be more apprehensive about inviting AlpInvest to co-invest on a deal, a scenario in which AlpInvest would be privy to much more sensitive due diligence on a target. Similarly, this executive said his firm is less likely these days to call on GSO Capital to provide sub-debt for a transaction. “If word got to Carlyle, they could come in and buy the company,” the executive said. “I don’t think that would happen, knowing the people at AlpInvest. But it would give us pause in doing it.”

The deal is the latest example of consolidation in the funds-of-funds business. On Dec. 2, a few weeks before the Carlyle-AlpInvest news broke, New York Life Investments agreed to buy a 60 percent stake in Private Advisors. That same day, Indian financial services firm Religare Enterprises Ltd. announced that it would pay $171.5 million for Landmark Partners, a Simsbury, Conn.-based secondary buyer and fund-of-funds manager. In February, Religare also bought Northgate Capital Group LLC of Danville, Calif. And in June, Affiliated Managers Group acquired fund-of-funds manager Pantheon Ventures Ltd. in a deal with an estimated value of $775 million.

Executives at Carlyle declined to comment.