When it comes to the annals of fund raising history, few can match the talent, wits and connections of the Carlyle Group, so named for the Carlyle Grand Cafe in Washington, D.C., according to my conversation years ago with a senior partner there. The roster of pundits and staff members there reads almost like a White House Alumni phone directory, so the headline article in the WSJ seemed oddly out of place. Essentially, “Carlyle Cut Fees to Sell New Fund,” goes on the explain that in order to raise a significant $2.3 billion dollar fund, Carlyle had to offer unique initiatives and terms that are very much out of the mainstream for how these deals get done.
This isn’t even the largest deal to close, according to the WSJ, but fifth behind Lone Star, Morgan Stanley, Blackstone and Beacon, two of which raised over twice as much as Carlyle, although the terms weren’t disclosed. What passes for a successful fund raise then, begins to point out what may be obvious to you, why?
Softening in real estate demand isn’t unusual and we’re in the midst of a cycle, where capital allocation and preferred rates have to match the availability of product at a price that works. Given the necessity to mark to market, at least when you’re buying, if not holding, and looking for in place cash flows to grow, you’d expect very attractive returns in the intermediate term. What we have here in an indication of the declining faith of institutional capital in the ability of the sector to perform and tougher standards for compensation, fees and carried interest. By some accounts, the Carlyle fund has cut some fees in half and reduced the basis for its carried interest much more severely than any fund previously, once again suggesting that size doesn’t insulate you from risk. The global expectation for returns from commercial property investment continues to become much more conservative. With the continuing unrest in Europe over monetary policy and the seeming inability of the U.S. Federal Reserve to arrive at a sustainable policy response, the indications for commercial real estate, most notably apartments, large regional mixed use projects and special purpose redevelopment are clear. There is little new capital to find its way into development, and existing pricing power will remain intact for the foreseeable future. As long as there is uncertainty in the capital stack, cap rates will remain compressed and new developments, most notably in constrained and infill locations will emerge slowly. Carlyle proved finally what has been said privately for the past year, that plentiful capital is running scared and new investment will cost even more than before.
Jack Kern, our Accidental Economist, is the research editor for Commercial Property Executive and Multihousing News and has actually been to the Carlyle Grand Cafe a couple of times. While not a piano player himself, he succeeded in saying, “play it again, Sam,” to a guy named Elliot, who promptly called him an idiot. If not for the fact the martini was perfect, he might have been offended. You can reach or insult Jack at firstname.lastname@example.org or by calling 301.601.1900.