Carlyle expects secondaries to play bigger role

Funds managed by AlpInvest doubled fee related earnings to $12m in Q2 2020.

Carlyle Group expects its secondaries subsidiary AlpInvest Partners to become a bigger component of its holdings, its chief financial officer has said.

Speaking on the Washington DC-headquartered firm’s second-quarter earnings call on Thursday, Curt Buser said its investment solutions unit, which houses AlpInvest funds, made “increasing contributions” to its overall platform, with primary, secondaries and co-investment blends delivering a 12 percent net internal rate of return as of 30 June, 2020.

“The fee growth and the fundraising that we’ve seen in our investment solutions business, particularly at AlpInvest, has been fantastic,” he said.

“It’s just really good performance for these products. The investors really appreciate it. It’s allowed us to scale this business.”

Buser also noted that AlpInvest’s performance has contributed to an uptick in fee-related earnings – $12 million in Q2 this year – up from $6 million in Q2 of last year, primarily driven by activating management fees on AlpInvest’s latest secondaries programme.

Fee related earnings of $20 million year-to-date were 59 percent higher compared with $13 million in the prior YTD period, according to Carlyle’s latest earnings materials.

Buser also noted that the AlpInvest’s European waterfall structure makes it a “stronger driver of distributable earnings going forward”.

“The other thing that I like about this business is when we bought it, we didn’t buy the embedded carry, and these are European style waterfalls, which means it takes a while for that carry to come in… and really be attributed to us.

“So while you’ll see low net carry numbers coming off of this business – because most of it is going out to other owners – as we move forward, our percentage of that will increase.”

Carlyle acquired Amsterdam-headquartered AlpInvest in 2011 from Dutch pensions APG and PGGM.

Fundraising in the firm’s investment solutions business reached $1.4 billion in Q2 2020, according to Carlyle. This was driven by closings for AlpInvest’s latest vintage secondaries programme, AlpInvest Secondaries Fund VII, which has an $8 billion target. It is unclear how much has been raised thus far for the vehicle and Carlyle did not provide further details during the call.

Kewsong Lee, who will become sole chief executive at Carlyle in September upon co-chief executive Glenn Youngkin’s retirement, also noted that the market dislocation has brought about opportunities in secondaries.

“Other owners of alts are looking to find ways to manage liquidity and manage their portfolio and manage allocations across their investment portfolio,” Lee said. “It’s actually a very good time to be thinking about secondary types of strategies, which positions our solutions segment and our AlpInvest team in a very good way.”