By Tom Stabile
February 14, 2018
Carlyle Group and KKR raked in mounds of new capital in the fourth quarter – scooping up more than $40 billion between them. And both firms see a fundraising rush for private alts vehicles continuing, thanks in large part to strategies beyond their private equity buyout roots.
Carlyle hauled in $24.7 billion in the fourth quarter, a big chunk of the $43.1 billion it raised for all of 2017 – an annual total that topped its prior record year by 40%, said CFO Curt Buser on the company’s earnings call last week. While its U.S. private equity buyout fund contributed about half of the fourth quarter total, it got about half of the yearly fundraising tally from other areas, including global credit, real assets, and its secondaries and fund of funds arm, Buser said.
KKR’s $15.7 billion fourth quarter fundraising tab drove its $38.7 billion annual total, with large contributions from real estate, private credit, and separate account mandates, said Craig Larson, managing director for investor relations, on its quarterly earnings call last week.
The healthy pace should continue, said Co-CEO Glenn Youngkin on Carlyle’s call. ‘The fundraising environment continues to be good and we currently expect to raise approximately $25 billion during 2018,” he said.
While Blackstone Group’s fundraising total of $62.2 billion in the fourth quarter trounced its rivals, the firm typically outpaces the market by large margins. About $33 billion of Blackstone’s fourth quarter assets came through acquisitions.
A fundraising landscape teeming with promise for buyout shops reaching for new segments rings true even beyond the big firms, says Jeff Eaton, partner at Eaton Partners, a placement agent firm, which in recent years has met that demand by adding teams specializing in credit, real estate, and real assets funds.
“Buyouts are still a core focus where the bulk of the capital will be raised, but we’re seeing the same diversification trends as these big firms,” he says.
The appetite to expand is clearly present, according to a recent survey conducted by Palico, an online fundraising marketplace, which found 53% of general partners looking to widen their product range to boost assets under management.
And managers of all sizes gunning for new targets have seen assets grow, says Kevin Campbell, managing director and private markets portfolio manager at DuPont Capital Management, a fund of funds manager.
“I’m not surprised that groups that have a strong brand in private equity… [have] the ability to raise capital for new strategies and new products,” he says. “We see that up and down the food chain.”
Investors, too, appear hungry for different alts strategies. One reason is that strong stock market performance has kept inflating the value of public equities holdings, leaving investors under-allocated to private alts funds and struggling to keep pace, Eaton says. Big investors also want to diversify alts portfolios because “there is only so much North America middle markets buyout exposure you can have,” he says.
Another factor helping non-buyout funds is varying levels of arm-twisting from fund managers that push for commitments to newer vehicles to ensure access to future buyout funds investors may covet, Campbell says. “Some groups are very explicit about it,” he says.
And there may be a hint of frenzy, a notion broached in a question on Oaktree Capital Management’s earnings call last week from Robert Lee, an analyst at Keefe, Bruyette & Woods, who asked whether investors are committing to new strategies “because they are just desperate for returns.”
Carlyle and KKR each have multiple areas beyond private equity where they see strong fundraising. KKR five years ago had raised no capital in real estate, but today has four fund types in the segment, a pattern it has repeated in other areas, Larson said.
And Carlyle is expecting strategies beyond corporate private equity to make up a higher percentage of its future asset and revenue growth, Youngkin said.
Private credit is a prime example, said Co-CEO Kewsong Lee. “We have considerable white space to launch new products and expand the investment mandates managed by our credit platform,” he said on Carlyle’s earnings call.
KKR also has seen traction from longer-life, 15-to-20-year strategies and custom strategic relationships with large LPs, which all told brought in $16 billion last year, more than half of its 2017 total, Larson said.
KKR plans to keep building up such assets, said Scott Nuttall, co-president and co-COO, on last week’s call. ‘Strategic partnerships [are] something that we want to continue to scale on a more continuous basis,” he said.
Meanwhile, Carlyle is studying the insurance market – an area Blackstone has also bet big on – for new territory to launch products, said Lee.
Not all forays into new segments pan out, Eaton says. “For every one you hear about that is a success, multiple have failed,” he says. “Just because you’re a good buyout manager doesn’t necessarily make you a good credit manager.”
And investors often see through a manager venturing into new areas just to gather assets, a common sight in the energy segment, says Eaton, who is based in Houston. The most promising new products tend to be in areas where managers regularly see deal flows they can’t tap with existing strategies, he says.
If today’s round of product expansion is successful, more private equity players are bound to follow the crowd, Campbell says. But if the efforts flop, managers may have to beat a path “back to the main fund,” he says, “and stop experimenting.”