AMERICAS NEWS: Carlyle’s perfect Solution

When The Carlyle Group announced that it had agreed to acquire Metropolitan Real Estate Equity Management, a real estate multi-manager with more than $2.6 billion in assets under management, it was easy to assume that Carlyle was doing so to fill a gap in its already comprehensive offering. After all, the purchase gave the Washington, DC-based firm an immediate presence in the real estate fund of funds business, one of the few areas of alternative investing in which it does not already have a presence. 
“In order to offer the market a full solutions capability, we needed to have the breadth of investment capabilities that allow us to work to meet our client objectives,” said Jacques Chappuis, managing director and head of Carlyle’s Solutions Group, a multi-manager platform formed in the wake of the firm’s 2011 acquisition of AlpInvest Partners. “Real estate is a major alternative asset class, so we were looking to add it to our investment capabilities.”
Still, the transaction represents much more to Carlyle, which sees Metropolitan as a key piece in its plans to build multi-asset class solutions business. “One of the things we will be doing is engaging with clients in multi-asset class solutions, which we expect to see more of as we build up the Solutions platform,” Chappuis told PERE. “What we intend to do is engage with a client and, instead of offering them a solution that is limited by a single product area, focus on what the client is trying to achieve and construct a product that may straddle multiple asset classes.”
Chappuis offered an example from the fund of funds world. “If you have a client that goes to a real estate multi-manager and says it is concerned about inflation, that manager is going to say that real estate is a great hedge for inflation. If that client goes to a private equity fund of funds and asks the same question, that firm is going to recommend an infrastructure-focused fund or a real assets-focused fund. A fund of hedge funds might say they could do something in commodities, while a traditional asset manager might say bank loans.” 
Chappuis continued: “None of those are incorrect, but the best answer is the result of analyzing what the client already has in its portfolio and its tolerance for illiquidity. Only then do you arrive at an answer that is customized to the client and could include all of those asset classes mentioned, or a subset of them. It is not limited to a single product area. That is something we will be doing more of and which I think is lacking in the marketplace.”
For Metropolitan, the transaction represents the culmination of a process that began nearly 18 months ago, when it hired Berkshire Capital as an advisor. “Robert Burke, David Nasaw and I started the business in the US in 2002 with just New York and San Francisco offices and grew to add London, Hong Kong and capability in Latin America,” said David Sherman, co-chief investment of Metropolitan and new head of real estate for Carlyle’s Solutions Group. “Over 11 years, we built a wonderful investment team on the ground in each of those major markets, focusing on investing with smaller, more focused managers – managers that we believe bring skills to both source deals that aren’t available broadly and do the work to create value. We love that business, and our team on the ground has been able to source new funds, co-investments and secondary interests in existing funds – the full range of investment capabilities.”
Sherman continued: “At the same time, we did not build global capital-raising abilities. Our clients were virtually all US investors prior to joining Carlyle. Not that we didn’t want clients in Europe or Asia, it was just that we didn’t have the resources to find them and serve them properly. It was just a matter of when, not if, we would need to be part of a larger organization. The thought of building our own global sales force for the distribution of essentially one product made no sense to me whatsoever.”
With regard to Metropolitan’s operations going forward, not much is expected to change on a day-to-day basis. Similar to Carlyle’s acquisition of AlpInvest, the team at Metropolitan – including Sherman and Nasaw – will remain intact, although Burke is expected to retire. The firm also will continue to operate under its own brand name, much like AlpInvest. 
“As we think about how we will go forward, in our traditional commingled funds where we pick 10 to 12 managers in a certain geographic region, there will be some research sharing and implementation of ‘best practices’ but not a whole lot of change,” said Sherman. “In fact, the product should look much like it did the year before or the year before that.”
Still, Chappuis’ vision of multi-asset class solutions offers the potential for Metropolitan to participate in a new way. “What Jacques is talking about is a whole new world of using our on-the-ground real estate people to fit into a much broader analysis of client needs,” Sherman added. “That is fascinating to us, and it is something we didn’t have the opportunity to participate in before.”