Carlyle Tries To Weather Rare Setbacks

Daniel D'Aniello, from left, David Rubenstein and William Conway Jr. founded Carlyle Group in 1987. The company returned $8.9 billion to investors last year, and all three men are billionaires, according to Forbes. (By Julia Ewan -- The Washington Post )
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"Carlyle continues to be one of our leading, top-quartile-performing investment managers," said Jon Carlo Mark, senior portfolio manager for private-equity investments at the California Public Employee Retirement System (Calpers), which owns a stake in the firm and gives Carlyle money to invest on its behalf. He added, "Blue Wave and Triple C [Carlyle Capital] are two small pieces of their overall investment activity and do not materially impact their performance as a Calpers partner or our confidence in them."

Even the local pension plans of the Service Employees International Union, which has criticized private equity, saying firms like Carlyle don't do enough for employees at companies they own, have no intention of pulling their money from the funds because of Carlyle's setbacks.

Carlyle owns 224 companies, from Hertz to Dunkin' Donuts; employs 950 professionals; and manages $82.7 billion from clients in 68 countries. Its list of directors and advisers includes many influential figures crossing political, corporate and philanthropic spheres.

Private equity's conventional model involves buying companies, taking them private, making them more profitable and selling them years later for a much higher price. The profits are then distributed to investors. Forty-one percent of Carlyle's investors are pension funds, and 32 percent are financial institutions, according to its annual report. Most of the rest are wealthy individuals.

Because private-equity firms earn fees based on the amount of money they manage for investors, the bigger they get, the more income they generate.

Carlyle built its reputation by buying mid-size defense businesses, worth a few hundred million dollars each, and turning them into more profitable enterprises over several years. That's a different skill set than overseeing highly complex credit products that are bought and sold by the minute, which is what Carlyle ventured into with Blue Wave and Carlyle Capital.

"Owning a business and having outright control is vastly different than trying to operate in an industry or asset class where you are making decisions in hours and minutes instead of years," said Erik R. Hirsch, chief investment officer with Hamilton Lane, which advises clients on investing in private equity.

Carlyle set out to open Blue Wave with more than $1 billion in assets but fell short of the minimum target by about $100 million. Losses and redemptions further eroded those assets to about $600 million before the company announced the fund's liquidation.

It wasn't the first time Carlyle has tried to master the art of hedge funds. The company in 2001 formed a high-profile fund of hedge funds called Carlyle Asset Management, which it eventually sold without remarkable success.

In Carlyle Capital, Blue Wave and Carlyle Asset Management, "Carlyle was trying to do something very, very different, and it's something they don't have experience doing," said Dan Primack, who writes a private-equity blog for Thomson Reuters. "Carlyle is still very successful in terms of private equity and has a very successful venture capital practice. Nevertheless, it hasn't done a good job expanding outside of private equity."

Carlyle was founded by Daniel D'Aniello, William Conway Jr. and David Rubenstein. Forbes estimates that all three are billionaires. The company last year returned $8.9 billion in equity and profit to investors, its second richest year, after 2006, when it gave back $10.2 billion, according to its annual report.

Mark A. Frantz, general partner with the Arlington venture capital firm RedShift Ventures and a Carlyle alumnus, said the recent setbacks are not a sign that Carlyle is on the rocks.

"These are just foul tips compared to the strikeouts that other private-equity firms are experiencing," Frantz said. "Overall, Carlyle is actually thriving, from everything I hear. The firm is an aircraft carrier, and it will sail through this storm in the market."