- Private-market fundraising surge to continue: Arpey
- Return expectations moderated in line with rates, markets
- Investors “broaden [private-market] palette”
1. Private-market fundraising has been surging for the past five years. Do you see this continuing in 2018?
Yes, I can see it continuing next year. What else is available for investors to invest in? When they look around the landscape, private-market opportunities provide them with what I think they believe to be the best risk-adjusted returns. They look at private markets, and the premium that private markets provide [over] those public markets, and they think increasing their exposure to those private markets makes sense.
2. What types of returns are LPs expecting from these portfolios? Are those consistent with what they’d expected historically?
I think investors understand that net returns will wind up [in the] mid-to-high teens … as opposed to 20 years ago, or even 15 years ago, when they’d expect those returns to be in the mid-20 percents, net. I think there’s been a realignment of expectations commensurate with where interest rates are, commensurate with today’s market.
3. Has the amount of committed capital that’s flooded the market contributed to the lower return profile?
When you look at defined-benefit plans, they have a target return objective that they hope to get to meet their liabilities, and if you don’t match that return objective, you’re either going to have to increase contributions or cut benefits. Or borrow and become more unfunded.
Public markets, particularly public fixed income, hasn’t provided sustained upside that it had before. I think [that] put upward pressure on private-market allocations.
4. What can LPs do to make sure they’re not overallocating to PE?
There are three trends I think [are] important to note. The first is the rise in interest in private credit. I think private credit has really become of high interest for these [limited] partners because it tends to be shorter duration, money can get deployed more quickly, and it truncates the J-curve because of the current-pay component associated with it.
The second thing they’ve done is they’ve looked to [what they] perceive to be uncorrelated strategies to other parts of their portfolio. [The push into real assets and infrastructure] is an indication of investors’ desire to have their portfolios less correlated.
The third thing is the whole advent of secondaries and co-investments, as a general matter. I think the level of interest around secondary strategies, because it has a truncated J-curve, it allows you to deploy capital more quickly. The same is true of co-investments.
I think what you’re seeing is investors broadening the palette of what they’re building their [private-market] portfolio around. So if there is a market correction or there is a problem in their portfolio, they’ve got more flexibility, and they’ve got more cash flow in those private-market strategies.
5. What does this environment — low interest rates, lower return expectations, a greater range of strategies — mean for Carlyle?
If you’re in our business and you don’t listen to the people you work for — namely limited partners — you won’t be in business too long. We have to be relevant to the needs of our limited partners.
One of the ways, for example, that we’ve made ourselves relevant is … a longer duration strategy for limited partners that allows them to have their money better matched against their long-term liabilities. That’s an example of our listening to our limited partners and developing new strategies that help them with the needs they have within their portfolios.
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Photo of Mike Arpey courtesy of Carlyle Group