Carlyle PE platform appreciates 32 pct, raises $20.5 bln in 2017

  • “It will be difficult” to match 2017’s performance: Lee
  • Recent stock market volatility “feels more like a healthy correction,” says Lee
  • LPs recognize need to boost risk exposure via alternatives: Youngkin

Carlyle Group set records for fundraising and distributions in 2017, investing $22 billion in new assets while raising $43 billion toward the $100 billion goal the firm set in 2016.

In a fourth-quarter earnings call, Co-CEO Kewsong Lee — who took the reins atop Carlyle with Glenn Youngkin earlier this year — said the firm expected its next generation of flagship funds to raise 30 to 40 percent more committed capital than their predecessors. In 2016, Carlyle said it planned to raise $100 billion over the next four years.

Carlyle’s $72.6 billion private equity platform, which represents more than a third of its total assets, raised $20.5 billion in 2017, of which $19.1 billion closed in the fourth quarter. Carlyle’s PE funds also invested $11.1 billion and delivered $11.2 billion in realizations.

The assets held through Carlyle’s PE funds, riding a bull market, appreciated 32 percent and generated $878 million in net performance fees last year. The segment’s economic income swelled to $896 million — a 300 percent improvement from 2016’s total.

The firm’s expectations for 2018, though positive, aren’t quite as high as the lofty returns it obtained last year.

“As we sit here today, the investment environment is challenging. With market valuations recently at all-time highs, recent volatility that we are all witnessing in real time, and the potential for upward movement in interest rates. It will be difficult for us to generate the same level of appreciation across our platform in 2018 as we delivered in 2017,” said Lee.

Lee noted that Carlyle’s approach hasn’t relied on strong equity markets or leverage, however, which should keep returns steady in the event of a downturn.

Furthermore, while recent volatility in the global stock market will likely present challenges for some investors, “the deals we have in the market haven’t been negatively affected,” he said.

Credit markets, often a barometer of economic health, remain open, Lee said. “Deals are still getting done.”

“The recent volatility feels more like a healthy correction, after a long, great thing” rather than anything that’s “game changing,” he added. “It’s just a really good reminder for us to avoid complacency.”

Similarly, LPs show no signs of slowing their allocations to private equity and other alternative-asset strategies, Youngkin said during the earnings call. LPs ratcheted up their allocations to private equity, private credit, infrastructure and other strategies in recent years as fixed-income returns stagnated in a low-interest rate environment.

“What these clients are doing is recognizing that they need risk exposure,” said Youngkin.

A continuation of this trend will benefit Carlyle as it launches new funds, particularly with its global credit business, which grew 13 percent last year to $33.3 billion of assets under management.

The “private credit market today appears strikingly similar to where private equity was 20 years ago” and will likely grow significantly over the next decade, Lee said.

Carlyle finished 2017 with $195 billion of assets under management across its private equity, investment solutions, credit and real assets platforms. Its fee-earning AUM grew to $125 billion in Q4, an 8 percent increase from the year earlier.

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Kewsong Lee, then a managing director for Carlyle, attends the Bloomberg Global Business Forum in New York on Sept. 20, 2017. REUTERS/Brendan McDermid