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Carlyle Weighs U.S. Real Estate Expansion, Rubenstein Says

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Carlyle Group Co-Founder David Rubenstein

Carlyle Group LP, the world’s second-biggest manager of alternatives to stocks and bonds, may add a real estate offering targeting about 10 percent returns, co-founder David Rubenstein said.

Carlyle is evaluating whether clients would be receptive to a so-called core-plus strategy in real estate, Rubenstein said at Morgan Stanley’s financials conference Tuesday in New York.

“We are looking seriously at the core-plus business,” said Rubenstein, Carlyle’s co-chief executive officer. “Core-plus is likely to be a very great growth business in real estate, critically in the United States. Nine to eleven percent, because interest rates have been so low, is a very attractive range for a lot of investors now.”

Core real estate includes high-quality, well leased properties such as prime office buildings, apartment towers and shopping malls. Core-plus refers to similar assets that might need extra work to boost values.

Blackstone Group LP, the biggest alternative investment firm, manages more than $5 billion in core-plus real estate after starting the offering in late 2013. The strategy may have $100 billion under management in a decade, Blackstone CEO Steve Schwarzman has said. The firm already oversees $93 billion in property.

Early Innings

“We’re in the very, very early innings in that business,” Jon Gray, Blackstone’s global head of real estate, said of the core-plus offering in a separate appearance at the conference Tuesday. “Out of the box, the performance has been good. If you could think about this three or four years from now, we would have these dedicated pools of capital that investors can park their money for a long term.”

Carlyle, which is based in Washington and manages about $15 billion in real estate, has predominantly focused on U.S. property for its opportunistic strategy, which it started in 1997. Opportunistic real estate investing typically targets returns of 15 percent to 20 percent. The firm’s international investments have fared less well, with one European property fund marked at 20 cents on the dollar.

Traditional Assets

Rubenstein also said alternative-asset managers, which include firms such as KKR & Co. and Apollo Global Management LLC, will increasingly move into traditional-asset management. These offerings would cater to clients seeking to cull the number of relationships with investment managers and also generate steadier fees for the firms, which public shareholders have historically viewed as more attractive than incentive-based earnings.

Carlyle’s stock has returned 59 percent, with dividends reinvested, over the past three years. Blackstone’s has returned 300 percent, Apollo’s has returned 144 percent and KKR’s has returned 140 percent.

“The biggest alternative firms will drift increasingly into doing some regular asset management,” said Rubenstein. “You tend to have more predictable fee income from regular asset management. That’s a trend you’ll see.”