By Thomas Heath
Washington Post Staff Writer
Thursday, November 6, 2008

Carlyle Group, the private-equity giant headquartered in Washington, this week held its first-ever telephone conference call with more than 400 investors in an effort to calm their nerves during the current financial upheaval.

The firm's troika of co-founders, William E. Conway Jr., Daniel A. D'Aniello and David M. Rubenstein, told investors that the firm would hold onto its portfolio of companies longer than usual because it can't sell them for the prices it wants in the current economic environment, according to Carlyle spokesman Chris Ullman.

That means investors will probably have to wait longer to see returns. Typically, Carlyle invests in companies for two to seven years, hoping to boost a firm's price before selling it or taking it public and returning the proceeds to investors. Even when deals are possible, investors may have to settle for returns lower than Carlyle's historical average of 26 percent annually, net of fees, the Carlyle executives warned.

Because of the sluggish economy, Carlyle has already written down its investment in certain companies. For example, the firm told investors that the value of its stake in the semiconductor company Freescale has fallen by half.

If Carlyle tried to sell HD Supply, the former Home Depot affiliate, under current economic conditions, it would get only 85 percent of its investment, the private-equity firm estimates. Carlyle told investors, according to people on the call, that it planned to hold on to the companies until the economy strengthens and allows for a higher sale price. The people spoke on the condition of anonymity because the call was private.

The purpose of the telephone conference was to "demonstrate that we understand what is happening and we are taking good care of our portfolio," Ullman said. "We are looking for choice investment opportunities in the midst of this market tumult."

The outreach by Carlyle comes on the heels of its annual investor conference, which was held in Washington in September. Since that time, the global financial system has seized up.

Conway has told people in the firm that asset prices are low but that he expects them to go much lower. That's when Carlyle may pounce. The firm has $89 billion in investors' cash that is ready to be put to use.

Many of those investors, including pension funds, endowments and high-net-worth individuals, are being squeezed from many sides. Some investors would rather not get a "cash call" from Carlyle at the present time asking them to fulfill their commitment and pony up cash so the company can make an acquisition.

Carlyle has been trying to find out whether any of its investors want to back out of their commitments. Rubenstein said that so far, no one has balked, according to people who were on the conference call.

"The [cash call] issue was raised prospectively," Ullman said.

The current credit crisis has caused some assets to become cheaper. But that works two ways. For Carlyle, it may present more attractive buying opportunities. On the other hand, the companies it sells may not get the price Carlyle was hoping to get. So the company said it was waiting for better times.

While there may be fewer deals, Carlyle is trolling the bruised financial sector, looking for bargain-basement prices, according to Carlyle insiders who spoke on condition of anonymity because they are not authorized to talk. Carlyle made a relatively small deal in July in Boston Private Financial Holdings, but it is looking to increase the size and frequency of its investments in the financial sector.