Side Letter: Carlyle eyes C-corp, Dyal’s debt strategy, China’s VC ‘herd’ mentality

Carlyle is last listed PE giant to convert to C-corporation, Dyal Capital Partners pitches debt product and Chinese VC managers flock to fewer targets. Here’s today's brief, for our valued subscribers only.

Just happened

Kewsong LeeC(arlyle)-corp conversion

Could Carlyle be the last of the listed private equity giants to convert to a C-corporation? According to Bloomberg the firm is planning to announce just that when it reports its second-quarter earnings (date TBD). Blackstone and Apollo most recently make the switch, announcing the decision with their respective Q1 earnings announcements. At that time, Carlyle co-chief exec Kewsong Lee (pictured) said on an earnings call that “the benefits we see from the conversion have not gone unnoticed”, and that the firm expected to make a decision “in the not-too-distant future”. Carlyle declined to comment on the potential switch.

Dyal-ing down

Dyal Capital Partners is moving down the risk spectrum with the launch of debt product, the Wall Street Journal is reporting (paywall). The idea is to issue loans to PE firms that aren’t interested in selling stakes in themselves. A spokeswoman for Neuberger Berman, Dyal’s parent, declined to comment. The move makes sense: many PE shops want liquidity to expand or cash out but don’t want to dilute their equity holdings – an opportunity ripe for debt and preferred equity players, as we discuss in this podcast with 17Capital.

Birds of a feather

VC managers are flocking towards a smaller number of Chinese targets. Speaking at RISE in Hong Kong on Tuesday, Yuan Li, managing director of Beijing seed investor ZhenFund, told delegates that an absence of innovation was partly responsible for valuations increasing “drastically” over the past few years and that this had prompted a “herd mentality” on appealing targets. Chinese VC investments have been trading at a 21.7x median EV/EBITDA so far in 2019 – a three-year high, according to S&P Global Market Intelligence.


Benven-EQT in Italia EQT has set up an outpost in Milan, joining several peers – including France’s Apax Partners – that are eyeing Italy’s buyout market. EQT’s near-term plans include staffing up and exploring opportunities in infra and real estate in addition to the firm’s core PE sectors of TMT, healthcare and industrial technology, MD and head of Italy Federico Quitadamo tells us.

Co-investment is no silver bullet We’ve heard it time and again: LPs can’t get enough co-investment. No surprise then that from 1999 to 2016 co-investment activity grew by more than 20 times, according to a report from CEPRES. Performance has been cyclical and plummeted from a record high of 56.2 percent in 2003 to just 1.1 percent in 2016. Co-investment may help to shave fees, but it is “not a silver bullet” the report notes.

Want more on co-investment? Check out our Deep Dive on the topic, which looks at whether LPs are taking on more risk than they realise.

Dig deeper

PE rises in Phoenix City of Phoenix Employees’ Retirement System has increased its private equity exposure from 4 percent in March 2018 to 5.7 percent last March. Here’s a breakdown of the $2.6 billion US pension’s total investment portfolio. For more information on COPERS and more than 6,700 other institutions, check out the PEI database.

City of Phoenix portfolio breakdownHe said it

“That was one of the things I debated when I was away for a year after leaving KKR. How do I combine philanthropy and investing at the same time?”

The late Alex Navab telling us in May about the importance of philanthropy and social impact and integrating it into the mission and culture of his firm, Navab Capital Partners. RIP.

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Today’s letter was prepared by Isobel MarkhamAdam Le,
Carmela MendozaAlex Lynn and Preeti Singh

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