Carlyle Sets Secondary Plan For LPs

Firm: The Carlyle Group

Fund: Carlyle Partners VI LP

Target: $10 billion

Placement Agent: None

In what may be a first for the buyouts industry, The Carlyle Group is offering investors an easy way out of its planned Fund VI, according to people familiar with the plan.

A provision in the PPM for Carlyle Partners VI LP offers prospective LPs a list of preferred secondary buyers, against the chance that the investors might someday want to exit the planned $10 billion fund before its 10-year life expectancy runs out by way of a so-called “liquidity window.”

“It’s a natural evolution of the market, a way for investors to get rebalanced,” said one secondary buyer, who asked not to be identified by name or by firm because of competitive sensitivities.

A person familiar with the strategy of the Washington, D.C., buyout megafirm said the designation of preferred buyers could ease their exit in a world of widening investment opportunities. But two competitors in the secondary fund business said the provision was at best a marketing device in a crowded fundraising market or at worst a way to try to restrict the options of limited partners if they did want to sell.

Such rebalancing is likely to become more popular in the future. The mid-decade LBO boom of the 2000s saw a huge influx of new investors, and new cash, into the asset class. As a result, secondary sales of partnership interests–once a relatively rare occurrence–have become a more accepted fact of life.

Still, a fund giant like Carlyle Group, which has more than 1,400 LP relationships globally, is unlikely to be perturbed if some investors want out, said the secondary buyer, who noted that the GP must give approval for any transfer of partnership interests. “Smaller firms are a lot more sensitive about who their LP is.”

Indeed, if Carlyle Group were to use its list of five preferred buyers as a way to limit an investor’s choices, that could work to the LP’s detriment, said an executive of a large money management firm that also invests in secondary interests. “Why limit you to five secondary players? Wouldn’t you rather have ten?”

Investors would be free to seek other buyers, said the person who is familiar with Carlyle’s strategy. But those who work with the preferred secondary buyers—identified in published reports as Goldman Sachs, Partners Group, Landmark Partners, Coller Capital and Credit Suisse—might be able to close out their sales more quickly because those buyers would be expected to be more familiar with the fund and its holdings.

Carlyle Group began marketing for Fund VI earlier this year, with a target significantly smaller than its predecessor, Fund V, which raised $13.7 billion in 2007. Bloomberg news first reported about the liquidity window provision.

Carlyle Group declined to comment, citing regulatory concerns. Not only is the firm raising Fund VI, it also is in registration to go public. In an update to its IPO registration document filed with regulators on March 15, Carlyle Group said it returned a record $19 billion to investors in 2011, up from $8 billion in 2010, sister news service Reuters reported. As of the end of 2011, its buyout, credit and real estate funds collectively had about $22 billion in dry powder.