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Carlyle says it will stick with institutional investors even as peers chase wealthy individuals. Here's what's really going on.

By Asia Martin,

Kewsong Lee, co-chief executive officer of Carlyle Group, speaks during the 2018 Yahoo Finance All Markets Summit at The Times Center on September 20, 2018 in New York City. John Lamparski/Getty Images
  • Top private equity firms like Blackstone are aggressively pursuing wealthy individuals to grow assets.
  • Carlyle says it plans to stick with its bread-and-butter business of raising money from institutional investors.
  • Analysts say Carlyle's plan makes sense as it seeks to grow its profit margins.

At a time when private equity firms are tripping over themselves to sell to wealthy individuals, Carlyle Group appears to be taking a different tact.

During the company's third quarter earnings call, Carlyle's chief financial officer seemed to pooh-pooh efforts by peers like Ares, KKR and Blackstone to chase after retail investors, usually high-net-worth individuals who don't have enough investable assets to participate in the same funds as institutional investors, like endowment, pension, and sovereign wealth funds.

"Our plan is really built on remaining focused on our institutional channel. It's long-term capital. It's extremely attractive, it's driving our topline growth," said CFO Curtis Boser in response to Evercore ISI analyst Glenn Schorr's question.

Boser remarks come as other private equity firms race to beef up products and services aimed at individuals. In October, Ares launched its wealth management solutions unit with the intention of providing retail investors more access to its private market products, including private equity, credit, and real estate. KKR's global head of client and partner group, Eric Mogelof, said in September that the firm was ramping up its content and marketing efforts to the advisors of rich investors. And Apollo announced in the Spring that it created a new team to develop retail-friendly products offered through financial advisors.

Analysts say Carlyle's decision to focus on its institutional clients makes sense because of Carlyle's size, saying that it needs to stick to its core business as it grows profit margins. They see the $293 billion in assets under management firm jumping on the retail craze down the road.

"Carlyle has plenty of growth on their plate right now, and, as much as I think they should and want to, it costs money," said Schorr, the Evercore ISIS analyst who prompted Boser's comments, in an interview with Insider.

"They're trying to improve their FRE margins," he said referring to their fee-related earnings.

The profit Carlyle collects from fees has been hovering in the low-to-mid 30 percent range this year. Schorr said they're hoping to get to the 40 percent range over time.

The Washington, DC, firm's largest peers have margins in the 50 percent range. KKR reached the 60s last quarter.

"It's hard to compete with Blackstone when they've already got a well built out institutional business. It could be a lack of the infrastructure necessary to make a splash. I don't hold it as a negative just because they're not jumping on board," said Sumeet Mody, a senior analyst at Piper Sandler.

Carlyle has a retail channel that targets high-net-worth individuals through its feeder funds, which are smaller pooled investment funds that use scale to invest in a master fund. It's been successful, generating 10 percent to 15 percent of Carlyle's capital raises. But Boser said the institutional portion of its business has been driving the bulk of fee-related earnings.

Carlyle has had record growth with its fundraising this year. By the end 2020, the company run by Kewsong Lee had amassed $27.5 billion in spite of the economic slowdown. In the third quarter, the firm raised $10 billion, bringing the total to approximately $40 billion for the year and $50 billion for the past 12 months.

The company wants to reach $130 billion or more in fundraising by 2024. The previous multi-year goal was $100 billion, which it overshot by 8 percent.

Mody thinks Carlyle will start looking to develop its retail business more at the end of its fundraising supercycle. Schorr said Carlyle might do it in the next two years.

Carlyle execs said they feel confident that growth will continue if they stick to their four-year plan that CEO Lee laid out at Carlyle's Investor Day in February. They expect to see fee-related earnings soar over the next three years.

Private equity's retail investor craze is being driven by demand. Investors have been starved for diversification in a low interest rate environment that benefits the private equity industry.

"For the most part, PE has outperformed the public markets," said Steven Kaplan, professor at The University of Chicago's business school. "The number of public companies has declined substantially since the late 1990s. The companies that are public are tech-heavy. Accordingly investors perceive — and there is evidence that they are correct — that PE provides diversification over investing in public markets."

Meanwhile, the number of millionaires has been on rise across the globe, even in the face of the pandemic, increasing by 5.2 million to 56 million in 2020, according to Credit Suisse's latest Global Wealth Report. Nearly 40% are domiciled in the US and 6 million more millionaires are expected to crop up within the next five years, says the report.

It's not just the high-net-worth investors. Some firms may be eyeing the ability to sell to ordinary investors after an Securities and Exchange Commission subcommittee recommended giving less wealthy investors more access to private funds. The recommendation has not yet been approved by the agency, and it's unclear if it will and in what form. But if it does, it could potentially open the door to Main Street investing in private equity.

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