Investor response to The Carlyle Group closing its dedicated Asia property business has been mixed, PERE has learned.

The Washington, DC-based private equity firm has told investors it is planning to part ways with its team in the region by the end of the year. That group, which is led by 14-year company veteran Han Chen, had most recently focused exclusively on real estate investments in China.

The team will now be spinning off from Carlyle to become an independent firm and will execute its own transactions while continuing to manage Carlyle’s existing Asian property investments through to exits.

The decision to close shop in Asia was unexpected by at least one investor in Carlyle’s China real estate business. “I was surprised to hear they were pulling the plug in a country that will be getting more strategically important in the future,” the investor said.

Following their separation from Carlyle, the existing arrangement of management fees and promote-sharing between Chen’s team and the private equity firm are likely to remain in place, according to one source familiar with the matter. However, at least one investor expressed concern about whether such a compensation structure would be sufficient to support Chen and his team once they begin to operate independently.

“We want the team to be more incentivized,” the investor said, adding that without an adequate compensation structure, “the team that Han leads could disintegrate.”

Carlyle has told investors that it will continue to provide oversight over the investments made by Chen and his team. “They’re on the hook to make sure the platform remains stable until the investments are exited,” the investor said, adding that “they do not want their brand name to be tarnished as a result of what’s going on. They understand the fiduciary responsibility.”

Another investor, however, said the spin-out of the team was not at all a concern, since the group would remain involved with Carlyle’s existing property investments in the region. “We’re very comfortable with our investment,” that investor said.

Carlyle will continue to pursue new real estate investments in Asia through its Asia buyout business, focusing on private equity-style, platform-level investments. Meanwhile, the firm’s Asia business itself has restructured to also include buyouts, growth, real estate and RMB-denominated investments – all under Carlyle Asia chairman Xiang-Dong ‘XD’ Yang. But the firm will cease to have a dedicated real estate business in the region.

The decision to close its Asia real estate operations marks a shift in direction from five months prior. In April, a spokesman firmly denied Carlyle was shutting down its Asia real estate business following the departures of Jason Lee, head of Carlyle’s Asia real estate business, and Adam Metz, head of international real estate. “Carlyle’s China based-real estate team continues to be active, seeing significant investment flow across a range of real estate in China, ranging from logistics to select office opportunities,” he said.

Carlyle has taken on a new approach to its Asia investments under Glenn Youngkin and Kewsong Lee, which succeeded co-founders David Rubenstein and Bill Conway as co-chief executives of Carlyle in January. The restructuring, along with the focus on entity-level investments in real estate, is part of a plan to achieve greater scale in the region, according to one source familiar with the matter. However, PERE understands that Chen and his team, who had specialized in asset-level transactions, ultimately were not compatible with Carlyle’s new focus on platform-level property deals, leading Chen’s team and the firm to agree to separate.

Chen’s team, which comprises eight to nine professionals, manages a China real estate portfolio that consists of the remaining assets in a $500 million separate account formed with the National Pension Service of Korea in 2014 – investments the firm is expected to exit by the first quarter – and 12-14 properties from Project Rome Logistics, a China-focused logistics co-investment vehicle that focused on developing, building and operating 10-15 warehouses in various cities across China. The Project Rome investments are not expected to be harvested for another three to four years, a source said.

Investors in Project Rome are understood to include the International Finance Corporation, which disclosed on its website an investment of up to $30 million in May; Munich-based insurer Allianz Real Estate; London-based Aviva Investors; Cleveland-based real assets consultant and multi-manager Townsend Group; and the Sacramento County Employees’ Retirement System, which committed $20 million during the first half of 2017 and subsequently re-upped with an additional $20 million in April, according to the pension plan’s quarterly real estate report in June. Allianz, Aviva and SCERS contributed to an initial $180 million capital raise for Project Rome in early 2017, while IFC, Townsend and SCERS wrote checks for a subsequent fundraise in early 2018, bringing the total equity raised to $365 million-$385 million.

The departure of Carlyle’s China real estate team was the final blow to what had become a much-diminished platform in Asia.

In 2001, Carlyle launched its Asia real estate platform led by Jason Lee. In 2005, the firm raised $410 million for its first Asia-focused real estate fund, Carlyle Asia Real Estate Partners I, targeting investments in China, Japan and South Korea.

The firm, however, has struggled to raise capital in the region since then. In 2008, it set out to raise $1 billion for CAREP II but ultimately closed on just $485 million in commitments.

In 2013, Carlyle returned to the fundraising trail with its third pan-Asia opportunistic real estate vehicle, Carlyle Asia Real Estate Partners III. The firm targeted $750 million in commitments for the fund, which would have been focused primarily on China, and was expected to hold a first close that summer. However, by early 2014, Carlyle had discontinued its fundraising efforts for CAREP III, opting instead to focus its efforts on its managed accounts in the region, PERE reported at the time.

In April 2016, Conway revealed during an earnings call that the firm intended to raise a China-focused real estate fund. “I’d be disappointed if it doesn’t get to at least $500 million,” he said at the time. Carlyle China Realty Fund, which initially targeted diversified real estate opportunities in China, was later converted to focus predominantly on the country’s logistics sector. It ultimately raised a total of $400 million.

In February, Carlyle decided to effectively discontinue new investment from Carlyle China Realty Fund following two departures from its Asia Pacific team, SCERS said in its June report. Around the same time, Lee and Metz left the firm, while Carlyle also suspended a $500 million China-focused real estate separate account with NPS that was intended to have been a follow-on commitment to the similar-sized 2014 account.

The firm has not disclosed performance data for its CAREP funds in its quarterly earnings results, but the funds are understood to be generating below-target returns. Meanwhile, the firm has over the past few years eliminated its on-the-ground presence in its other Asia offices, including Tokyo and most recently, Hong Kong.