New York City-based hedge fund Okumus Fund Management has bought nearly 9 percent of the publicly traded shares of Carlyle Group, placing a big bet that the District-based public-equity firm is worth more than is reflected in its beaten-down stock price.
“It’s a very undervalued business we think we are getting at a big discount to fair value,” said Ahmet Okumus, founder of the firm. Okumus began buying Carlyle shares last month and disclosed the purchases with the Securities and Exchange Commission more than a week ago. He said he continues to buy shares.
The firm’s investment of 7.43 million shares costing approximately $124 million got Carlyle’s attention.
“When we see somebody like Okumus jump in and buy like this, we’re happy,” said Glenn Youngkin, Carlyle’s president and chief operating officer.
Closely held Carlyle Group is controlled by William E. Conway Jr., Daniel A. D’Aniello and David Rubenstein, the threesome who founded the firm in 1987.
Only 80.2 million of Carlyle’s 324 million units are traded in the public market. That means Okumus owns 8.8 percent of the shares available for public purchase, but 2.2 percent of the total.
“Carlyle should be ecstatic,” said Tim Loughran, a finance professor at the University of Notre Dame. “Somebody actually stepped up to the plate and bought a huge amount of their stock.”
Okumus principals describe themselves as activists, but they say that doesn’t apply here. The private-equity firm’s structure as a publicly traded partnership prevents outsiders from agitating their way onto Carlyle’s board of directors.
Okumus said he simply sees a bargain.
“We like the fact that [the stock has] been hammered over 50 percent over the last seven, eight months, because we like to buy things that are on sale,” Okumus said.
With $550 million under management, the vast majority of which is its owners’ money, Okumus is a deep-value investor looking for stocks that have the potential to increase in price. It was founded in 2013.
Okumus, with seven employees, owns 9 percent of LifeLock, an identity-theft protection company based in Arizona. It also owns shares in Web.com Group, a Florida-based provider of Web services to small and medium-size businesses.
Tim McAlea, director of research at Okumus, said Carlyle shares have been pummeled by negative news reports over the past year, but it has a strong core business.
“We like [Carlyle], because it’s a great franchise that’s growing its assets under management constantly for 30 years, with a great management team that owns 75 percent of the company,” McAlea said.
Once known primarily for its defense investment acquisitions, Carlyle has gone mainstream in recent years, buying and selling Dunkin’ Brands, Hertz, commercial construction supplier HD Supply — even a life insurance company in China.
As a traditional private-equity firm, Carlyle aims to use its own and borrowed money to buy companies, fix them and sell them at a profit. Those profits are distributed to its limited partners, or investors, primarily pension funds but also wealthy individuals, sovereign wealth funds and foundations. Separately, people can also buy shares in Carlyle on the Nasdaq exchange.
A world economy made bumpy by a severe drop in oil prices, rising U.S. interest rates, a slowing China and strong U.S. dollar has taken its toll on big investment firms in the past six months.
Stocks have dropped for asset managers such as T. Rowe Price, BlackRock and Carlyle-rival KKR & Co., but few have been hit has hard as Carlyle. The firm’s energy bets and the performance of its hedge fund, Claren Road Asset Management, generated negative headlines.
Investors pulled $6 billion out of Claren Road last year, forcing Carlyle to write down its value.
“That’s very little economic impact to the whole company,” McAlea said. “It’s immaterial to the financial statements. It’s more of a headline risk.”
Carlyle shares, which rose as high as $31.88 over the past year, have dropped by more than half. The shares were trading at $15.62 Thursday. Okumus expects it to head back into the 30s or higher.
David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business, said private equity has become more crowded and competitive, which may also be weighing on stocks.
“The low-hanging fruit and easy profits have already been picked,” he said.
Carlyle’s Youngkin said investors in its funds who have stayed with the company have profited handsomely. But the stock market is still getting to know Carlyle, which began trading in May 2012.
“If we continue to generate strong returns, then the public will learn to trust us like our fund investors do,” Youngkin said.