"Hedge funds and private equity funds are secretive pools of capital blah blah blah," people always say, and there's some truth to that. But it's partly true partly because a certain discretion is required by law. Banging on publicly about how awesome your hedge fund is could be taken as a "general solicitation" for investors, which was (and still is!) verboten, though nobody at CNBC takes that risk particularly seriously. But now that's changing, sort of, sometime, with the JOBS Act, which will eventually allow hedge funds and private equity funds to advertise to the many though still only sell to the few.
Carlyle Group is now selling to the slightly-more-few via a Central Park Advisers feeder fund called CPG Carlyle Private Equity Fund, with a minimum of just $50,000. In keeping with no-general-solicitation rules, the Confidential Memorandum describing the CPGCPEF "is intended solely for the use of the person to whom it has been delivered for the purpose of evaluating a possible investment by the recipient in the Units of the Fund described herein, and is not to be reproduced or distributed to any other persons," but it is also filed with the SEC. It's super secret! It's only available to anyone with a computer!
The memo, and today's Journal article about the Central Park fund, are fascinating reading. But also so, so sad. Here's the Journal:
With the new offer, Washington-based Carlyle hopes to reach a broader swath of wealth—which the firm estimated at more than $10 trillion, according to people familiar with Carlyle's thinking.
The minimum for entry into Carlyle's funds previously was between $5 million and $20 million, according to a securities filing for the new fund. The new fund, with a minimum investment of $50,000, will be available to "accredited" investors, essentially those with $1 million in wealth not including their homes.
Private-equity firms are seeking to tap into the collective wealth of individual investors as pension funds — the cash cow that for decades has filled their coffers — face an uncertain future.
The number of U.S. workers with only so-called defined-benefit retirement plans has fallen by about a third over the last two decades while those paying only into defined-contribution plans, such as 401(k) savings accounts, has risen more than five fold, to about 68% of workers in 2010, according to the Center for Retirement Research at Boston College.
Every part of that is sad. Start with the old "pension funds reach for yields by overallocating to alternatives" story, in which defined-benefit plans realize that they don't have enough cash to fund their beneficiaries' retirements and so risk the cash they have chasing higher returns with the accompanying higher fees. Surely some pension somewhere is outperforming the market by paying big fees to invest in spivvy things, but "everyone will retire by growing their retirement assets faster than the economy grows" is pretty obviously not a real strategy.
Add to that this uncomfortable chart from Sober Look showing that the biggest buyout-fund returns were from vintage years 1998-2004, while the biggest buyout-fund fundraisings were for vintage years 2005-2007. Chasing returns is sort of the opposite of catching them.1 First you get the big returns, then you market to institutional investors on the strength of recent returns, then you market to individual investors on the strength of considerably less recent returns.
Then add that nobody gets a pension any more: they just get a 401(k), and no one has any money in their 401(k). I guess accredited investors do? Still instead of having one fund manager reach for returns to fund everyone's retirement, now you can have everyone reach for returns to fund their own retirements. Presumably the pension managers are mostly better at it?
Oh and then add the fees. Here's the Journal:
Carlyle's standard fees of 1.5% for managing money2 and 20% of profits will apply to the fund, as will a fee of about 1.8% that will pay Central Park Group to manage the fund and brokers to sell it to investors.
That's putting it gently; the Confidential Memo actually reflects (estimated) total annual expenses of 3.68%, plus up to a 3.5% up-front sales load. Presumably CalPERS pays less.3
Usha Rodrigues writes about this story:
I've written recently about the fact that the rich get access to more investing opportunities than everyone else. In Securities Law's Dirty Little Secret I speculate that this differential treatment might be getting harder to maintain. I speculate that investors may not be content for much longer with being shut out of buyout funds and the like. Indeed, I'm working on a short piece now that will argue that JOBS Act Section 201's elimination of the prohibition on general advertising will make the contrast between the investing opportunities available to haves and have-nots all the more stark. It used to be that we couldn't hear advertisements from hedge funds and other private investment opportunities. No more. In the post-JOBS world the airwaves and Internet may tout investment after investment that only the wealthy can actually take advantage of.
So ... sure? Another possibility is that all that touting will convince the wealthy that some of the investments they're taking advantage of are taking advantage of them? Regular-people 401(k) investments are advertised with boring standardized disclosures that stress asset class, past performance, and fees. And then you go buy the ones in the asset classes you want with the best performance4 and the lowest fees. And you still retire impoverished but it's a start.
Rich-people investments do at least some of their advertising on exclusivity and sex appeal. Bernie-Madoff-I-rest-my-case, you know, but I suspect that the prospect of investing in LBOs - of finally being the barbarian at the gates - appeals to the mass-affluent for reasons not solely economic. It's possible that that appeal - "invest with the secretive and possibly evil Carlyle Group!" - works better when it's made by your private wealth advisor sharing with you a Confidential Memo that you're not allowed to show anyone. When it's in your newspaper advertising 3.68% annual fees, and it's right next to a Vanguard index fund ad, it might lose some of its effect.
1.That's generic, not Carlyle-specific. Some Carlyle fund IRRs are in the appendix to that Confidential Memo and, while the post-2004 funds aren't fully invested, ... yeah? Note in particular the monotonic decrease in IRRs, and increase in committed capital, of the CP II/III/IV/V funds (the flagship "Carlyle Partners").
2.Page 14 of the CM actually says "The Investment Funds in which the Fund intends to invest generally charge a management fee of 1.00% to 1.75%, and approximately 20% of net profits as a carried interest allocation, subject to a clawback," but close enough.
3.TBF CalPERS is locked up while this fund has some mumbo-jumbo about giving you liquidity after two years, but no promises.
4.Obvs that part is dumb.