Looking for Deals, Carlyle Fund To Invest in Distressed Companies

The Carlyle Group has formed a $1.35 billion fund to troll for bruised companies and securities less than a month after the failure of one of its own investments.

The District-based private-equity firm closed the new fund, Carlyle Strategic Partners II, last week, Carlyle said yesterday. The fund will look for solid companies and investments whose value has been beaten down by the current economic malaise.

"We are a deep-value investor that is investing in everything from the top of the capital structure in distressed bank debt and bonds to buying a distressed company," said Raymond A. Whiteman, co-head of Carlyle's distressed investing activities.

Whiteman said that Carlyle planned to accept $500 million for the fund but that hungry investors piled $1.35 billion into CSP II.

"This is in large part because of where we are at in the distress cycle," Whiteman said. "We are clearly in the early stages of the distress cycle, and people are seeing that it has become top-of-mind for institutional investors and, now, for a lot of the market."

Whiteman said he does not expect to have trouble finding good deals. The huge number of buyouts over the past several years are likely to present several opportunities.

"You are looking at several hundred billions of high-yield debt and bank loans issued in the last few years that may very well have some problems with them," he said.

Whiteman said he had his eye on several wheezing industries, including the automotive, financial and telecom sectors. Carlyle has particular expertise in the automotive, telecommunications and defense industries. The company has 60 funds and $81 billion under management.

One of its funds, Carlyle Capital, collapsed into insolvency last month after it began defaulting on $21.7 billion in assets. The publicly traded company, which had been set up in 2006 on the island of Guernsey, off the coast of France, had borrowed money to buy AAA mortgage-backed securities issued by Fannie Mae and Freddie Mac. Those are traditionally considered secure and conservative investments.

As the market value of the Fannie Mae and Freddie Mac securities dropped, Carlyle Capital's lenders asked it to increase its cash equity in those securities from what was 1 percent to as much as 5 percent.

An increase of that amount on $20 billion in loans amounts to several hundred million dollars.

Carlyle ended up losing about $900 million of its employees' and its investors' money on the deal.