Sacramento pension puts Carlyle on watchlist over Asia real estate move

Sacramento County Employees’ Retirement System added Carlyle Group to its watchlist following the firm’s decision to exit the Asia real estate business by year-end. 

Investment managers on the watchlist are subject to enhanced scrutiny and even termination upon board approval of a staff recommendation, according to pension documents.

Carlyle manages multiple closed-end opportunistic real estate funds for the pension system. But its new Asia real estate strategy raised concerns on changes in management structure and increased risk of further management-team departures, pension documents said.

The pension system declined to comment on the action it would take for now.

The Sacramento pension system committed $10 million to Carlyle China Realty fund and $40 million to the Carlyle China Rome Logistics vehicle. 

Carlyle launched Carlyle China Realty fund, targeting $500 million, in 2015. The fund had a value-added strategy and was expected to generate gross returns in the high teens, a source said. 

The fund raised $120 million in commitments by mid-2017, when the firm stopped seeking capital for it, Bloomberg reported.

Instead, Carlyle made a midterm correction and merged the fund with the co-investment vehicle called Carlyle China Rome Logistics. The merged vehicle, Project Rome, had $400 million in total commitments, the source said. 

Other investors in Carlyle China Rome Logistics included Allianz, Townsend Group, IFC and Aviva, the source said.

Carlyle’s exit

Carlyle said in September that it would separate the Asia real estate business by year-end, media reports said.

Han Chen, a Carlyle director based in Shanghai, will lead the spinoff.

Chen and the existing team will manage the investments in the China Realty fund and other Asia investments, and manage the business as a subadviser, a second source said. A name for the spinoff has not yet been announced, the source said.

“Spinning out our China Real Estate team into a standalone business will help ensure team continuity and optimal returns for our investors. Carlyle will still be the ultimate decision maker and hold a significant equity stake in the investments,” a Carlyle spokesperson told Buyouts. 

The existing arrangement of management fees and promoter sharing between Carlyle and the new entity is expected to remain in place, pension documents said.  

Carlyle’s Asia real estate business consists of Project Rome; an unrealized investment, Crest, from the $500 million separate fund managed on behalf of National Pension Service of Korea; and Aurora Place, an office building in downtown Sydney.

But Carlyle will make no new investments in the fund, and Chen and his firm can raise outside capital to invest further, the second source said.

The strategic direction for Carlyle’s China investments evolved from four distinct businesses into one integrated platform under Xiang-Dong Yang, who was co-head of buyouts in China previously, the second source said. 

First, growth equity was integrated into buyouts, followed by RMB.  Real estate was the last one to be integrated into the platform, the source said.

Several key people in Carlyle’s Asia-focused realty investments have left the firm this year. 

Adam Metz, head of international real estate, and Jason Lee, the Hong-Kong office based head of Asia real estate, left earlier this year.

Meanwhile, the Sacramento pension system this September removed Och-Ziff Capital Management, the global alternatives asset manager, from its watch list after almost two years.

The pension system added the firm to its watchlist in October 2016 following the announcement of legal settlements with the Department of Justice and SEC for violations under the Foreign Corrupt Practices Act.

Increased organizational stability and reduced business risk resulted in Och-Ziff’s removal from the watchlist, pension documents said. 

Action Item: Read Sacramento pension system’s document here: https://bit.ly/2q3xuRw.