Carlyle Group takes private equity to the middle class

For most investors, private equity is a bridge too far. Along with hedge funds and other high-risk investments, most countries have limits on anyone but “sophisticated investors” placing their money in these ventures.

But in America, the world’s second-largest private equity fund is opening itself up to retail investors.

Carlyle Group has filed documents with the American Securities and Exchange Commission outlining its plans to set up a $300 million fund that would then put that money in funds managed by Carlyle Group. The Washington-based private equity firm isn’t allowing retail investors to invest directly in its funds, but they can put their money in a fund that will then, in turn, invest it in Carlyle Group.

How much money do you need to get in on the action? Just $50,000, provided you have $1 million in assets besides your primary residence (that limitation comes not from Carlyle, but from US regulators – net worth is the key way it determines whether you’re a “sophisticated investor” who is allowed to gamble in high-risk financial ventures). The fund is American, but plans to source up to 40% of its money from “Asia” ­– which presumably would include Australian investors.

Currently, the only way Australia’s middle-class can invest in the high-finance world of private equity is through the handful of listed private equity funds.

Carlyle’s play is intriguing for a couple of reasons. The private-equity giant already has $157 billion in assets under management, so this $300 million fund is just a drop in the ocean. Maybe the group is after the management fees, which are far higher for this fund than is typical for private equity.  

Secondly, Carlyle’s middle-class bid is unique in the world, including in Australia. No Australian private equity firm has announced any intentions to chase the retail investor dollar.

Retail investors aren’t generally a group being chased by private equity.

Dr Katherine Woodthrope, the chief executive of the Australian Private Equity and Venture Capital Association (AVCAL), says too many investors can make signing a cheque to buy a company far more complex.

“The model in private equity and venture capital is that investors commit a certain amount, which they don’t then give you to store in a bank. It’s a commitment,” she says. “When you decide to make an investment decision and write a cheque, you then call your investors, who give you their proportion of the amount needed. If you have a dozen sophisticated investors, it’s very easy to manage the process.”

Putting in calls to 200 investors could be problematic, especially if a purchase is risky, as many private equity plays frequently are. Carlyle Group is getting around this by using a different model for its retail investors. They put their money in a fund, as opposed to making funding commitments to be called on in the future.

In Australia, ASIC regulations prevent those with less than $500,000 to invest, or a net worth of $2.5 million, from investing in high-risk ventures such as private equity and venture capital. However, to keep things simple and to allow quick decisions, most private equity players want far more than a couple of hundred thousand as a minimum investment.

“Most private equity firms, if you look at the average size, raise funds of $250 million going up to a few billion,” Woodthrope says. This means private equity generally wants people to invest millions at a time. But if you’ve got a taste for risk and a pricey investment property – along with a spare $50,000 – maybe it’s worth looking into the Carlyle Group fund.