Perched on Pennsylvania Avenue between the White House and the U.S. Capitol, the Carlyle Group has become Washington’s resident representative among the world’s corporate financial elites.
The homegrown, publicly traded private-equity firm is spoken of in the same breath as rival buyout shops such as Blackstone Group, KKR & Co. and even, occasionally, investment bank Goldman Sachs, the Wall Street gold standard.
Carlyle’s co-founders schmooze at Davos and Aspen. They give millions of dollars to charity. Its investor meetings feature such speakers as Hillary Rodham Clinton and former president George W. Bush.
But the company’s road to the high ground has had its share of potholes, and the firm has been haunted of late by stumbles in the hedge fund sector. Investors have pulled $6 billion out of a troubled hedge fund, Claren Road Asset Management, in the past year, forcing Carlyle to write down its value.
Investments in energy and European real estate have underperformed in recent quarters. A commodities fund that trades in corn and non-precious metals at Carlyle’s Vermillion Asset Management has lost millions, causing investors to bail and its co-founders to depart.
Carlyle’s stock debuted at $22 a share in its initial public offering three years ago. It is now trading below $20.
Then there’s superstar banker Michael J. Cavanagh, whom Carlyle hired from JPMorgan Chase in 2014 with the expectation that he would play a major leadership role. After about a year on the job, he left to become Comcast’s chief financial officer.
The gyrations have investors wondering whether Carlyle can become less dependent on its hit-driven, leveraged-buyout business, which typically accounts for most of the company’s profits.
Like many other private-equity shops, the firm now calls itself an alternative asset manager, an investor’s version of a supermarket.
Under that model, leveraged buyouts remain the core product. Other activities — focused on such interests as real estate, energy, debt products and commodities — are like the in-store coffee bar, pharmacy and pizza parlor, nontraditional sales points that can bring in new customers and additional revenue.
Carlyle began in 1987 as a leveraged-buyout firm. It found ailing companies, fixed them and sold them for fat profits. Today, its legions of number crunchers and dealmakers range over the world. They can be found in the Americas, Europe, sub-Saharan Africa, India, East Asia and Australia. Its many interests include railroads and oil refineries, water utilities, hedge funds and turnpike service stops.
There is no disputing Carlyle’s chops as a leveraged-buyout shop, said Steve Kaplan, a finance professor at the University of Chicago’s Booth School of Business.
“The question is whether they can bring that expertise to other asset classes,” Kaplan said. “That is an open question. When you are bigger and more diversified, like Carlyle, KKR and Blackstone, you will have some winners and some losers. What you’ve seen recently with Carlyle is some losers.”
The challenge is similar to that facing famed investor Warren Buffett’s Berkshire Hathaway: The bigger you get, the harder it is to find investments that move the needle.
Carlyle is a huge player in various fields. It’s stand-alone leveraged-buyout funds are among the biggest in the business. It owns more corporate debt than just about anybody other than Blackstone.
Carlyle’s investments are divided into four broad segments. Corporate Private Equity is the largest, with $63 billion in assets and cash. It is run by a staff of 250 investment professionals, who scour the world looking for companies to buy and sell. The money from those sales is distributed to Carlyle’s limited partners, most of which are pension funds.
Other Carlyle segments include Real Assets, with $42 billion invested in real estate and other interests. Global Market Strategies has $36 billion under management in various credit and other financial instruments, including funds such as Claren Road. Investment Solutions manages $51 billion in complex alternative investments.
It’s all part of the diversification from leveraged buyouts.
“Blackstone, Apollo [Global Management], KKR, Carlyle, they are all going down this path,” said Robert Lee, a managing director at Keefe Bruyette & Woods.
“Some of Carlyle’s initiatives feel like they have had more success than others,” said Lee, who is bullish on Carlyle stock. “Certainly the hedge fund initiative has been more of a mixed bag. These things take time.”
Carlyle isn’t the only firm challenged by hedge funds. Fortress Investment, for example, recently announced that it will liquidate part of its hedge fund business.
Glenn A. Youngkin, Carlyle’s president and chief operating officer, acknowledged that some investments haven’t worked, but he said the firm is ”extraordinarily stable” across its segments.
“Yes, everybody is focused on the hedge funds,” he said. “But they really are overshadowing a lot of good performance and business developments in the non-private-equity segments.”
The company has made billions from investments in Dunkin’ Donuts, Hertz, Beats headphones, Chinese currency and the paint company Axalta Coating Systems, to name a few.
Youngkin compared Claren Road to the 2002 Oakland Athletics baseball team, as described in the book and movie “Moneyball.” The players are selected based on deep quantitative analysis. “We are trying to have all of our players be good, and occasionally one doesn’t work well,” he said. Claren Road “is one hedge fund which had 10 years of great performance and ran into a nine-month bad patch.”
Most of the firm’s investments in the Real Assets sector, which includes oil production and infrastructure as well as real estate, have performed well, including U.S. real estate, with net returns of 24 percent.
But the sector has been hobbled by bad bets in European real estate, investments made before the financial crisis, and by ill-timed energy investments that have suffered with the drop in oil prices.
“European real estate has been a challenge for us for quite a while, and as a consequence Real Assets has been viewed as an underperformer,” Youngkin said.
Youngkin said the company has rebounded in energy. It has $12 billion in cash — “dry powder” in private-equity parlance — waiting to be invested in that space.
Youngkin played down the drop in Carlyle’s stock price, especially given the volatility in the market over the past summer.
The company has paid out $7 a share in dividends since it went public three years ago, which comes to a return of more than 30 percent for shareholders who bought Carlyle shares at its $22 debut price and held on until now.
Youngkin has doubled down and bought more company stock. Last month, he bought 100,000 shares for $2,121,000.
“We have been and we continue to be a very successful, multi-product firm,” a Carlyle spokesman said. “The fact that we have had challenging performance at Claren Road doesn’t undermine the success of so many of our businesses over a long time.”