Carlyle Group Preps New Vehicles, Steals Merrill Fund-Raisers –

The Carlyle Group is preparing to launch a series of private equity funds in the coming months that will lead it into new investment territory and further the firm’s bid to become a money management powerhouse. To aid the effort, the Washington, D.C.-based firm also has recruited two senior placement agents from Merrill Lynch & Co.’s private equity group.

According to a source close to the firm, Carlyle soon will launch a venture capital fund with a target of between $200 million and $300 million that will invest in Internet companies in Europe. Early next year, the firm will launch an Asian Internet fund, a Latin American buyout fund and a Japan buyout fund. The firm also is considering raising a hedge fund.

In September, Carlyle will launch its third U.S. buyout fund, which the source said would target significantly more money than the firm’s $1.33 billion previous domestic fund.

In anticipation of this fund-raising flurry, Carlyle this month hired Robert Brown and Lee Carson, marketing professionals in Merrill Lynch’s New York and San Francisco offices, to manage investor relations and fund marketing.

The changes at Carlyle are part of an industry-wide trend-many firms with established credentials in the U.S. buyout market are expanding their franchises to include funds that target non-U.S., non-buyout investments. Carlyle currently manages a European buyout fund, a real estate fund, a U.S. venture capital fund, a collateralized bond obligation fund and is raising an Asia buyout fund with a cap of $1 billion.

In addition, this month Thomas H. Lee Co. teamed with Putnam Investments to offer a family of alternative investment funds (see story, p. 3).

The Blackstone Group also is assessing new investment products. The New York firm is looking to bolster its fund-raising and investor relations capabilities, according to Kenneth Whitney, a senior managing director at the firm. Blackstone is contemplating raising international and industry-specific private equity funds, among other products.

Blackstone already manages buyout funds and real estate funds, and currently is raising a $750 million mezzanine vehicle (BUYOUTS April 19, p. 3).

Another private equity firm looking to expand fund offerings is Chase Capital Partners, which last month brought on board David Mullane, a Merrill Lynch alumnus, to oversee the marketing of third-party private equity funds-a new step for the group (BUYOUTS July 5, p. 4).

Mr. Mullane said the trend toward fund diversification is, in part, due to limited partners’ desire to invest increasing amounts of capital with fewer managers. Many buyout professionals, he says, are eager to accommodate this demand by putting their firms’ names on multiple products: “They say, We’re smart guys, so invest with us and we’ll figure it out.'”

A general partner from a buyout firm currently expanding its fund offerings, who declined to speak on the record, said changes in the buyout industry are merely the signs of natural business expansion in a maturing industry. He dismissed concerns by some observers that the creation of new funds would detract from firms’ core buyout businesses. “Fidelity [Investments] has 385 funds,” he said. “I don’t think [Chairman] Ned Johnson is running them all.”

The G.P. also said having a diverse family of funds will help attract talented young professionals to the firm, who will see working in different areas as beneficial to their careers.

Whither Placement Agents?

In order to manage the increased fund-raising activity, private equity firms increasingly are bringing marketing professionals in-house-a move they see as being more cost effective than hiring an outside firm, according to industry observers.

One placement agent, not at Merrill Lynch, said the pay packages Carlyle offered Messrs. Brown and Carson may be in excess of $1 million per year. By contrast, placement agent firms typically charge between 1% and 2% of a fund’s final tally. In other words, a private equity firm can expect to pay at least $10 million to outsource the marketing of a $1 billion fund.

The trend toward in-house marketers has yet to affect Merrill Lynch’s private placement business, according to Kevin Albert, a managing director at the firm. He noted that Carlyle and Blackstone have never used outside placement agents. Most buyout firms will continue to raise funds intermittently, he said, and this will keep operations like his in business. “This isn’t something where we see the sky falling,” Mr. Albert said. “I don’t think a majority of the private equity firms will decide to go the multi-product route.”

Greg Meyers, an analyst in Merrill Lynch’s New York office, will replace Mr. Carson in San Francisco. The firm has found a professional from a competing placement agency to fill Mr. Brown’s slot, though Mr. Albert declined to comment further.

In related news, Merrill Lynch has expanded Mr. Albert’s duties to include managing the firm’s middle market U.S. Private Client’s Private Sales & Divestitures Group.