Carlyle Shutters DGAM Hedge Fund-of-Funds Unit It Bought in 2014

  • Youngkin says `challenging market' hindered DGAM's growth
  • Firm to refocus efforts on building AlpInvest, Metropolitan

Two years after buying it, Carlyle Group LP will shut down a hedge fund-of-funds manager that was a prong in its push to expand beyond private equity.

Employees of Diversified Global Asset Management were told Friday of the operation’s demise, according to Carlyle spokesman Chris Ullman. DGAM co-founders George Main and Warren Wright will leave after they wind down the Toronto-based business, which oversees less than $2 billion in fee-paying client assets.

The move comes two months after Carlyle replaced Jacques Chappuis as head of investment solutions, the unit that houses DGAM along with buyout and real estate fund-of funds.

“A challenging market made the business difficult to grow,” Carlyle President and Chief Operating Officer Glenn Youngkin said in a telephone interview Saturday. “We are refocusing our investment solutions segment on areas where we see real momentum.”

In a statement sent to Bloomberg, Carlyle said it will incur “some modest wind-down costs over the next few quarters and a small goodwill charge in 2015,” as a result of DGAM’s closing.“We believe with this change we will increase distributable earnings in our investment solutions segment in 2016,” it said.

Market Volatility

Washington-based Carlyle, the world’s second-largest alternative asset manager with $182.6 billion in assets at the end of last year, has struggled to gain traction in hedge funds at a time when market volatility has hampered fund returns.

Claren Road Asset Management, a credit hedge fund manager in which Carlyle purchased a majority stake five years ago, has seen its assets drop to $1.3 billion from $8.5 billion in 2014 as returns fell and investors pulled out. Vermillion Asset Management, acquired in 2012 and later renamed Carlyle Commodity Management, lost more than 97 percent of its main fund’s $2 billion in assets in the wake of soured futures bets.

Carlyle’s three hedge funds, including Emerging Sovereign Group, collectively fell 6.5 percent in value in 2015, Carlyle reported this month. That compared with an average 3.65 percent loss for hedge funds overall, according to the HFRX Global Hedge Fund Index.

While the hedge fund-of-funds business outperformed that mark, Carlyle believed its growth prospects were rocky. DGAM, which managed $2.9 billion in fee-paying assets when Carlyle bought it for $31.1 million in February 2014, according to a filing, picks third-party managers for clients to invest with. Carlyle saw it as a means to expand into so-called liquid alternatives that invest in index futures and exchange-traded funds.

DGAM found itself losing ground in a segment where marquee brands tend to pull in the most new business. The biggest player, Blackstone Alternative Asset Management, a unit of Blackstone Group LP, managed $65.7 billion in fee-paying clients assets at year end.

DGAM’s shuttering leaves Carlyle with two fund-of-funds managers: AlpInvest Partners, which steers clients to third-party private equity funds, and Metropolitan Real Estate Equity Management, which just completed raising a $550 million pool to buy stakes in property funds via the secondary market.

The group managed $46.2 billion in client money at the end of last year, down 7 percent from two years earlier, the bulk of it placed with AlpInvest. In 2015, investment solutions generated 1.4 percent of the firm’s $923 million in distributable earnings, a measure of cash profit. Lauren Dillard, a 14-year Carlyle veteran who was the group’s chief operating officer and chief financial officer, now heads the unit.

“AlpInvest’s active funds were up 24 percent in 2014 and 18 percent last year,” Youngkin observed. “We’re focusing resources behind two businesses that have good performance and good growth prospects.”

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