Carlyle Tries To Weather Rare Setbacks

Failed Finds Tarnish Equity Giant's Image

Carlyle Group over the past two decades has built a sterling reputation as one of the most successful private-equity firms in the world, with a stable of advisers that has included former presidents and prime ministers, investment returns that have earned billions for clients, and a trio of founders who became fabulously wealthy -- all with nary a hint of losses.

But the near-mythic reputation that started in 1987 has been bruised over the past several months as the District company has endured some high-profile financial troubles.

It started in March with the $700 million implosion of 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.

Carlyle suffered another hit last month when it announced it would liquidate Carlyle-Blue Wave Partners Management, a vehicle that made similar bets in mortgage-related securities. Blue Wave, begun in spring 2007, failed to earn enough fees to cover its overhead, and Carlyle decided to shut it down.

In the midst of those setbacks, Carlyle's expected gain in SemGroup, an oil marketing company based in Tulsa, may be wiped out because of the company's recent filing for bankruptcy reorganization. And China last month announced that it had declined to sell Carlyle a minority share in an industrial company there after a three-year courtship by the firm.

Like many other large private-equity firms, Carlyle pursued a rapid-growth strategy in the era of easy credit. In 2007, a hugely active period for buyout firms, Carlyle spent billions acquiring a number of U.S. companies, including Home Depot Supply, Manor Care nursing homes and Freescale. A spokesman said the companies, while facing headwinds, are on track to earn Carlyle a profit because the firm factored economic downturns into the business plans.

The most closely watched deal has been the one for Freescale, a supplier of semiconductors to big manufacturers such as Motorola and auto companies, which Carlyle and others bought in December 2006 for about $17 billion. Freescale has been slowed by the downturn, but Carlyle said the company has strong cash flow and nimble financing and will eventually sell for a big profit.

Home Depot Supply could be hurt if the economic slowdown continues to hammer the housing and home-building industries. Carlyle bought the supply arm of the home-improvement chain for $8.5 billion last year, negotiating it down from an original offer of $10.3 billion.

"We are going through one of the most uncertain and difficult periods in the world of finance that we've seen in recent history," said Frederic V. Malek, a former Carlyle senior adviser who now runs his own private-equity funds. "Any firm, especially one as widespread as Carlyle, is going to have some stumbles. But what is more germane is to judge a firm by its long-term record of returns to investors, and it seems to me that they have done a darn good job in that category."

Carlyle spokesman Chris Ullman said in a statement: "With innovation comes the occasional setback. However, over 20 years, product and geographic expansion has served our investors well, generating firm-wide 26 percent annual net rates of return.

"Our portfolio is solid and performing on plan. We bought strong companies, financed them conservatively and are working hard to create additional value."

Carlyle investors said the firm hasn't lost its touch.