Private equity can be a blunt instrument to reorder unproductive businesses and create vast wealth. Its creative destruction has been defended by the likes of Mitt Romney, the presumed GOP presidential nominee who built his fortune at Bain Capital, a major private-equity firm.
Much of the public debate about private equity has focused on super-wealthy individuals like Romney and Rubenstein, with less attention on how the industry works. Carlyle took the unusual step of allowing access to its players behind the UniBoring deal, offering one window into the practices of private equity, from cost-cutting to layoffs, from its acquisitions to factory management.
This is how private equity is supposed to work: With UniBoring, Carlyle and its investor-managers would end up taking a money-losing local manufacturer with 465 employees and $100 million in revenue and within six years building it into a global firm with 2,365 employees and nearly $600 million in revenue. They sold it last December for more than $400 million, earning many times their investment, according to published reports and an analysis by The Washington Post. The bounty was shared by Carlyle and its investors, Swift and his auto team.
While most of Carlyle’s investments have achieved above-market returns for its investors, the firm has also had a few losers in its 25 years. In 2008 Carlyle launched Carlyle Capital, an offshore public company that invested in mortgage-related securities. The company’s business was to borrow money to buy the securities and to make money on the difference between the firm’s borrowing costs and what it earned on the interest paid on the bonds. But when the value of those securities dropped, lenders asked for more cash; they foreclosed when Carlyle refused. It lost $600 million.
It has had its share of corporate bankruptcies as well, including Hawaiian Telcom, the local phone company in Hawaii, and Oriental Trading Company, an Omaha distributor of low-cost party favors that Carlyle paid $1 billion for in 2006; it faltered in part under a heavy debt load and fell into bankruptcy. Carlyle bought Hawaiian Telcom in 2005 and put $425 million into the company. But the deal took a year to get approved by regulators, and the company began losing land-line telephone customers faster than anticipated. By 2008, it was bankrupt. In each case, Carlyle lost all its money, but the companies emerged from bankruptcy and are in business today.
Carlyle went public last week in a highly anticipated stock offering of $22 a share, which valued the firm at $6.7 billion. The stock closed Friday at $22.05.
When Swift and his team walked out into the streets of Midtown Manhattan that March day after the two-hour meeting, they weren’t sure whether they had a partner. They felt humbled and would look back on their presentation as undeserving of Carlyle’s attention.
As Swift put it, “We were guys with big dreams and very little money.”
Even before Carlyle had a chance to seal the deal and start turning UniBoring around, the deal began to unravel.