Carlyle to Help Johnson Launch Buyout Fund
Wednesday, December 14, 2005
Media entrepreneur Robert L. Johnson is starting a private equity fund to invest in corporate buyouts, with a crucial assist from Washington's Carlyle Group, the largest private equity firm in the United States.
Johnson's Bethesda-based RLJ Cos. will start a new firm, 20 percent owned by Carlyle, to buy and provide expansion capital to privately owned growth companies in the media, financial services and business services industries, the two companies said yesterday.
The fund is the latest effort in Johnson's drive to create the country's largest black-owned asset-management firm, a business overwhelmingly dominated by major Wall Street firms and white-owned private partnerships. In recent years Johnson's real estate investment company has amassed an $800 million portfolio of hotels, and last month he launched a hedge fund investment company in a venture with Deutsche Bank AG. The corporate buyout fund, like his other ventures, will seek to raise money -- a goal of $500 million initially -- from pension funds, wealthy individuals and endowments comfortable with the higher risk-reward of investing in private companies.
The partnership with Carlyle is vintage Johnson: Come up with a business plan that includes his minority status and business skills as a main selling point, find a well-heeled and established partner, and hire experienced managers to run the business. That was the strategy that built Black Entertainment Television, which Johnson founded in 1980 and sold to Viacom Inc. for more than $3 billion in 2000, making him a billionaire.
"This is a clear continuation of our effort to become a major player in all aspects of financial management," Johnson said yesterday from Charlotte, where he was attending a game of the Bobcats, the National Basketball Association team that he owns. "Carlyle and I have the same vision for it. If you find a very talented African-American-led team who wants to get into the private equity business, and match it up with Carlyle, it represents a model of what can be done throughout this industry to build minority-owned management firms."
Johnson said he will hire a team of seven to 10 corporate buyout professionals to manage the fund.
"There's an abundance of minority talent at majority-owned firms," he said. The buyout fund team will share offices with the hedge fund business and the hotel investment business, creating different asset-class "silos" under one umbrella, similar to the diversification strategies employed by Carlyle and a host of other major private equity firms.
The buyout fund, like the hedge fund investment firm Johnson formed last month with Deutsche, is designed to capitalize on the fact that state pension funds, university endowments and other institutional investors are trying to increase the amount of money placed with minority- and women-owned businesses, and are also willing to invest more money in private-equity investments.
Managers of corporate buyout funds charge investors a yearly management fee, typically about 2 percent of the total amount of the capital invested. In addition, buyout fund managers usually claim about 20 percent of any realized gains on the fund's investments, with the other 80 percent going to the investors.
Other minority-managed corporate buyout funds exist, including those that have partnered with major private equity firms, but none has been so ambitious in their launch. Carlyle's first buyout fund in the early 1990s raised only $100 million. Today, Carlyle manages more than $31 billion in investments in a range of corporate, specialty finance and real estate assets.
Also, in contrast to many minority-managed funds, Johnson's fund will not focus on minority-owned companies or companies serving ethnic markets.
Johnson said he will back any business with growth potential and a good management team, making investments of between $10 million and $40 million to help mid-sized companies pay for acquisitions or otherwise expand.
The Carlyle deal began earlier this year when Carlyle executives David M. Rubenstein and William E. Kennard, who both have ties with Johnson, proposed that Johnson join the firm as an adviser.
Johnson is on the board of Johns Hopkins University with Carlyle co-founder Rubenstein. Kennard, a former Federal Communications Commission chairman, was Black Entertainment Television's outside counsel in the 1980s when he was in private practice.
"I told him [Rubenstein] I'm not used to working for someone else," Johnson said, and proposed a separate partnership.
Kennard said there was a strategic reason for Carlyle's investment in Johnson's firm. "It helps meet a need in this business to increase the number of minority-owned managers," he said.