Lower Investment Minimums Are Rarely a Good Deal for Investors

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The Wall Street Journal reported in an article on Wednesday that the private equity firm Carlyle Group is lowering their required minimums for new investors to $50,000.

 Sounds like a win / win. Customers who were previously unable to get in because minimums were too high can now invest with the Carlyle Group and the Carlyle Group is able to have an additional source of revenue serving these new customers.

 But I think it will turn out for most customers to be a lose / win. Like the hotel brochure that promises a luxurious pool setting yet delivers something vastly different, lower investment minimums rarely live up to their potential and here’s why: 

• Any company that is well known for managing money shouldn’t have to lower their minimums in order to attract more money. Their past returns should be reason enough for current investors to stay with them and for future investors to invest with them. The latest figures has the Carlyle Group manageming $170 billion of assets. If they have that much money, I don’t see why they are chasing $50,000 accounts.
• Higher minimums usually mean lower fees and vice-versa, much like its cheaper on a per can basis to buy a case of soda vs buying a single can from a vending machine. The Wall Street Journal article discusses how customers with $50,000 are not investing directly with the Carlyle Group but rather in a company called Central Park Group which in turn will invest in the Carlyle Group. For this service, Central Park Group will charge investors 1.8% annual management fee that is in addition to Carlyle’s fee of 1.5% plus 20% of profits.
  • This means you as an investor have to earn at least 4.2% just to break even
    • 4.2% profit – (Carlyle’s 20% of profits fee = 0.84%) – 1.8% Central Park Group management fee – 1.5% Carylye Group management fee = 0.06%
    • Private equity investments also face the added disadvantage of typically not having daily liquidity, meaning some private equity companies such as the Carlyle Group only allow their investors to get out of their investments after several years.