Fund Management

Keeping faith with private equity funds: the Coutts deal with the Carlyle Group

30 May 2002

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Despite their demise in recent years against the backdrop of the bursting of the dotcom bubble and a big fall in management buy-outs, some p...

Despite their demise in recent years against the backdrop of the bursting of the dotcom bubble and a big fall in management buy-outs, some private banks are still raising significant amounts of money to invest in private equity funds. Most notable has been the recent Coutts & Co., deal with the Carlyle Group, the US alternative investment specialist. But some providers argue private equity funds often miss out in pure entrepreneur plays that investors feel they are targeting.

Coutts’ well established alternative investment group recently announced a deal with the Carlyle Group, whereby some of the private bank’s richest clients would have access to seven private equity funds, split geographically between Europe, the US and Asia, and investment class, between venture capital, buy-outs and real estate. "This gives our clients a pretty good diversification of risk," noted Bob Dawkins, head of Coutts’ alternative investment unit.

Coutts managed to raise around £115m to invest in the seven Carlyle funds and said there was consider interest from the bank’s clients. The particular structure of the Carlyle funds appealed to the bank’s clients, said Dawkins, with a quarterly five per cent draw down and tax efficient structures built in. “I think this is a good time to invest in such funds. If you look at those investing in private equity funds during the last bear market in the early 1990s—they made serious money during much of the last decade. There’s no reason why the same logic can’t apply now," said Dawkins.

Coutts decided to pick Carlyle because of its "excellent track record" in this asset class and because it was made considerably easier to structure the deal through one provider. "They certainly have the track record (the internal rate of return for Carlyle’s private equity funds has averaged 36 per cent) and they have the ability to deal with all the due diligence issues," said Dawkins.

But one has to be seriously wealthy to buy into a Coutts private equity fund, with a minimum of £250,000 required to gain entry. “We wouldn’t recommend anyone have more than five per cent of the entire portfolio exposed to private equity funds," said Dawkins. That means you need at least £5m to get a piece of the action.

Some believe many of these bigger funds fail to invest in entrepreneur start ups, largely because of the sums of money involved. "These funds typically target large buy-outs, around the $100-200m mark and large venture capital deals. They mostly miss the pure entrepreneurial opportunities such as start-ups, because the sums of money are too low for such funds to be interested and they’re not willing to do due diligence on them," noted Richard Harris, chief executive of Enterprise Private Equity.

Harris is attempting to rectify this by setting up a fund that specially targets start-ups, which many of the bigger funds have little interest in because of their size and the cost of due diligence. "We can cut down on due diligent requirements by creating a portfolio of such companies, which might typically have as many as 30 companies in it. We also limit our investment to around 20-30 per cent in each company, which minimises risk," said Harris.

Some fund managers are eschewing private equity funds altogether because of lack of investor interest. Vanguard Group, the US's second largest mutual fund company, has recently scrapped plans for a private equity joint venture with Hamilton Lane Advisors, the fund of private equity funds group. Others, such as JP Morgan Partners, have fallen far short of their initial fundraising targets.

"There is obviously a perception problem with private equity funds right now—as they are tarred with the dotcom bubble—but this is certainty changing and I’m sure they will gain considerable popularity in the next few years," said Harris.

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