Q. Big news recently in a lot of press outlets was that Carlyle was lowering its investment minimum to as little as $50,000. This was the latest sign of the big private equity shops opening their doors to smaller investors… Blackstone, Apollo, and KKR had already announced plans for traded products. But the Carlyle deal is different…
A. Right. First off, Carlyle itself didn’t change anything. What happened is that a new “registered private” fund was created that operates like a fund of funds — but is only investing in different Carlyle funds. These are closed-end, non-traded vehicles, somewhere between classic private placements and true liquid alternatives, open end, daily liquidity mutual funds. They offer liquidity at “intervals”, usually quarterly, by tendering for shares from investors. In a true “interval” fund that’s mandatory; in the Carlyle case its discretionary… but the idea is the same.

Q. So, to be clear, the people who invest in this vehicle do wind up investing in the Carlyle funds, but indirectly?
A. That’s right. This particular vehicle is essentially a fund of funds — that is, it invests in several underlying Carlyle funds. Many of these “interval” style funds do that, invest in several underlying managers, each of which is investing in relatively illiquid assets — could be PE, as here, or in timber, rare earths, other things that are impossible to get into an ETF or mutual fund.

Q. So what are the key points for investors looking at these structures?
A. Well, these are still private placements, so accredited investors only… and you’ll probably still have to invest 50 or 100k. Liquidity still not daily. But one really nice point is you get a 1099 instead of a K-1, much easier tax reporting.

Q. And yet… I feel a downside coming in here somewhere!
A. Ah, well: as always, you’ve got to look at the fees. In this example, you’re paying the full Carlyle fees, and another layer on top, and a sales load, too. That’s pretty heavy. But the structure itself is quite attractive for investors, and gets them exposure to strategies and managers that otherwise they’d have trouble getting.

Q. And what about the managers… what’s in it for them?
A. Basically, a good way to expand their investor base, especially once the JOBS Act regulations go final. Then, “private placements” will be able to be advertised. And with these vehicles, there’s no limit on the number of investor slots.