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The Dealmakers - Terence O'Hara

Carlyle Group Prepares for the Next Generation

By Terence O'Hara
Monday, January 31, 2005; Page E01

Carlyle Group is putting the finishing touches on what will be the biggest independently managed corporate buyout fund in history, a $6.5 billion pile of cash that will probably be the last such fund for Carlyle's three founders.

The Washington-based partnership began raising money for the fund, Carlyle Partners IV, in September. In just three months, according to Securities and Exchange Commission filings, it had $5 billion from a variety of institutions and wealthy investors. Sources close to the firm said the remaining $1.5 billion is likely to be in the bank in the next few weeks. They said interest in the fund was such that it could have raised more than $7 billion but that the firm's founders were worried that a bigger fund would drag down returns. A Carlyle spokesman declined to comment on Carlyle IV, but aspects of the firm's money-raising can be gleaned from public statements by Carlyle's peripatetic money man, David M. Rubenstein, to public pension funds over the past few months. Sources familiar with the firm, who spoke on condition of anonymity because they said they didn't want to be seen as speaking for Carlyle, also provided some insight into the fund and what it means for Carlyle's future.


David M. Rubenstein is the public face of Carlyle Group. (Susan Biddle -- The Washington Post)

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While Carlyle has become more diversified in recent years -- Asian and European buyout, real estate, corporate debt and venture capital are all solid parts of the Carlyle mix now -- U.S. leveraged buyout funds have been and will continue to be the heart of the firm's business for years to come. More than 65 percent of Carlyle's investments are bought-out companies, and almost three-quarters of its more than $12 billion in investments are in North America.

It is widely believed, inside the firm and out, that Carlyle IV will be the last Carlyle fund to bear the names of all the firm's founders -- Rubenstein, William E. Conway Jr. and Daniel A. D'Aniello. Carlyle IV, like its predecessor funds, is a pool of money raised from large U.S. and foreign investors to buy companies, typically by using a small amount of the fund's cash and borrowing most of the purchase price.

Not that any of the three is expected to step down any time soon. Each is in his fifties, and Carlyle's mandatory retirement age is 75. But Carlyle has been busily developing successors to the triumvirate, and in five years, when the firm's next U.S. buyout fund will be launched, one or more of the other 27 equity partners at Carlyle will probably be driving the bus.

The transition from the founders is part of an overall strategy designed to give Carlyle a shot at surviving them. In its current form, the leveraged buyout world has been around only since the 1970s. With varying degrees of success, the major independent partnerships that manage buyout funds, such as Carlyle, Kohlberg Kravis Roberts & Co., Blackstone Group, Forstmann Little & Co., have all grappled with the issue of succession and the institutionalization of the firm over founder.

At Carlyle, the process has been managed by Louis V. Gerstner Jr., the former International Business Machines Corp. chief recruited by Rubenstein to be Carlyle's chairman in early 2003. Gerstner's main responsibility at Carlyle, according to sources at the firm, has been to develop an infrastructure that will allow Carlyle to ride out the market volatility associated with private equity and create a system for identifying the firm's next leadership cadre.

Nonetheless, choosing successors to Rubenstein, Conway and D'Aniello won't be easy; that is especially true for Conway, the chief investment officer. Virtually no major investment by any Carlyle fund happens without his blessing, and he is considered the chief architect of Carlyle's performance. He has told friends and people inside the firm that he intends to be around for the life of Carlyle IV, which probably will be not more than 10 years, but hasn't committed to being a general partner in the next Carlyle buyout fund.

Rubenstein was a domestic policy adviser in the Carter administration before he went into the private equity business. He has one of the most storied networks of contacts in Washington and is the public face of Carlyle to its investors. D'Aniello runs most of the day-to-day operations of Carlyle. Neither has stated his intentions beyond Carlyle IV.

Though the firm is most widely known as a collector of former senior-level politicians and as a successful buyer of defense companies in the 1990s, in recent years the three founders have larded the partnership with talent from the private sector. Most of its large buyouts since 2003 have been in the telecommunications, media and industrial-automotive sectors.

In addition to Gerstner, Daniel F. Akerson (who goes way back with Conway when both were executives of the original MCI Communications Corp.) joined Carlyle in 2003 and is co-chairman of the investment committee of Carlyle's U.S. buyout group. Akerson and Conway share the chairmanship of that committee with Allan M. Holt, who has been with Carlyle since 1991.

Carlyle IV's size -- it dwarfs its predecessor U.S. buyout fund, Carlyle III, which finished raising $3.9 billion in 2000 -- will give these guys (only a handful of the more than 150 people working on Carlyle's buyouts around the world are women, and only one of them is a managing director) plenty to do while the firm works out who the next leaders will be.

And though it will hold the title for the biggest buyout fund ever, Carlyle IV probably won't hold it for long. Private equity funds are enjoying the best time ever to raise money because plenty of pension funds and other large institutional investors have collected healthy returns on private equity (better than the stock market) and are eager to keep that up by throwing money at funds with good track records. Thus, Blackstone, which previously had the biggest buyout fund ($6.45 billion), plans to establish a new fund this year that will eclipse Carlyle IV.

But for now, Washington, not New York, can lay claim to the biggest single pool of private equity capital in history.


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