Carlyle tweaks carry on latest tech fund – exclusive

Carlyle Europe Technology Partners IV, which closed on €1.35bn last week, will charge 25% carry after it returns 2.25x cost to LPs.

The Carlyle Group has introduced ratcheted carried interest on its fourth European tech fund, Private Equity International has learned.

Carlyle Europe Technology Partners IV, which closed last week on €1.35 billion, will charge a market-standard 20 percent carry until it returns 2.25x cost to limited partners, at which point it will jump to 25 percent, according to a source familiar with the vehicleFund III, a €656.5 million 2015-vintage, charged 20 percent carry.

Carlyle’s head of investor relations Michael Arpey told PEI last week that the firm was pleased to have set terms “appropriate to a fund like this” that would ensure alignment with its LPs. Arpey declined to disclose Fund IV’s terms.

“We’re only as good as our people and it’s important for our firm to ensure that they are appropriately incentivised,” Arpey said. “Creating the right set of terms for particular strategies that tailor both to the needs of the LPs and to our needs is what we strive for and we have accomplished with this fund.”

Ratcheted carry can be linked to net internal-rate-of-return or cash multiples, according to a 2018 report by law firm MJ Hudson. The objective is to reward the GP with a higher carry percentage if the fund achieves certain benchmark returns.

CETP IV was in high demand: one LP that committed to the vehicle told PEI it was the “craziest fundraise we’ve participated in” due to its short duration. Fund IV attracted twice the capital of its predecessor in just three months.

Prior performance would suggest LP appetite is justified. CETP II, a €530 million 2007-vintage, had generated a 2.9x multiple of invested capital across all investments and a 19 percent net IRR as of 30 September, according to Carlyle’s Q3 results.

Sales of tech assets have generated large exits for owners. The global average for general partner exits from IT companies in 2017 was 35x EBITDA – a jump from 24x the previous year, according to data from S&P Global Market Intelligence.

“We were pleased the limited partners understood terms that are consistent with what other top-performing technology funds have received to make sure the appropriate alignment of interest existed between them and Carlyle for purposes of this strategy,” Arpey added.

“We don’t try to do this on the corner of our desk: we try to do it with the right amount of resources. When you try to do things without those resources it can lead to more risk and less success.”