The Politics of Carlyle's $50,000 Gambit
While the Carlyle Group's decision to let investors buy pieces of the firm's funds with as little as $50,000 is no doubt aimed primarily at tapping a broader range of investors, it may also bolster private equity's political clout.
By law, private equity funds are allowed only to accept investments from "accredited investors," a regulatory designation that excludes anyone with liquid net worth of less than $1 million. But historically the funds have been far more exclusive than that, requiring minimum investments of $1 million or more and lockups as long as 10 years.
Carlyle now will allow accredited investors into its funds with for as little as $50,000—so long as they agree to pay a 1.8 percent fee to the Central Park Group, on top of the fees Carlyle charges investors who meet its normal, multimillion-dollar minimums.
The firm apparently figures that the lower entry fee will enable it to tap into $10 trillion of wealth in the U.S.
By expanding the constituency for private equity investing, however, Carlyle could also be expanding private equity's political strength. The biggest funds may not face the same public relations challenges in the U.S. that they do in Europe—where they are regularly referred to as locusts and other nasty creatures—but their exclusiveness has bred suspicion and prompted elected officials to threaten tax hikes.
Broadening the base of private equity investors could make it harder for politicians to bash the funds. Many of the new investors are likely to be the same people politicians rely on for major donations. If investors fear that, say, a change in carried interest taxation would mean higher fees, they might pressure politicians not to raise taxes. In short, Carlyle could be creating a yeomanry of investor lobbyists for itself.
Is it too cynical to suspect that this is one of Carlyle's motivations in opening up its funds? As I said, no doubt access to more money is the primary motivation. But Carlyle is famously agile when it comes to politics and government. It's hard to believe this hasn't crossed the minds of its leaders.