Diversification makes sense for private-equity managers seeking more revenue, diminished risk and a less cyclical business than a pure buyout firm, said Anthony Tutrone, head of the alternatives unit at New York-based Neuberger Berman Group LLC. It's not clear how investors in private-equity funds benefit, he said.
"With a large fee base, the manager wins regardless of performance," Tutrone said. "Investors want to avoid situations where managers stop questioning whether they win and instead are just asking by how much."
The firms say investors' interests are aligned with those of the founders, who have their own money in the funds. Carlyle partners, management teams and employees have committed or invested more than $4 billion of after-tax dollars alongside Carlyle's funds, according to the company's annual report.
Lower Fees
Some wins from diversification come with smaller profit margins. Buyout firms typically collect a 1.5 percent to 2 percent fee on assets under management and a 20 percent cut of any profit. While the new businesses may produce comparable management fees, they can offer little or no incentive fees.
One Blackstone fund specializing in commercial loans and junk-rated debt charges an average 1.2 percent annual management fee and gets no incentives for good performance. Carlyle's AlpInvest, which has more than $57 billion in assets under management according to its website, generated about $86 million in 2009 revenue, which included management and incentive fees.
Blue Wave
The new ventures face established rivals in asset management and real estate and aren't always profitable.
Carlyle Blue Wave Partners, the firm's first attempt at a hedge fund in 2007, saw assets drop by a third to $600 million by 2008 as the market for mortgage securities froze. Carlyle Capital Corp., a mortgage-bond fund, missed more than $400 million of margin calls and was suspended from public trading in 2007 after less than two years. Apollo's real estate unit posted a first-quarter loss the company said was tied to the purchase of Citi Property Investors from Citigroup Inc. in November.
Competitors include BlackRock Inc., the world's largest money manager with $3.6 trillion of assets under management, whose initial backers included Blackstone. BlackRock is also expanding its private-equity and real estate offerings and has $115 billion invested in such so-called alternative products, Chief Executive Officer Larry Fink told investors last month.