Subject: Carlyle Said to Seek Stake in Hedge-Fund Firm Amid Buyout Slump - Bloomberg
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Devon Archer" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Curt Hastings" <[email-masked]>, "Neil Callahan" <[email-masked]>
Date: Fri, 17 Sep 2010 08:40:45 -0400

Carlyle Said to Seek Stake in Hedge-Fund Firm Amid Buyout Slump
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By Cristina Alesci, Saijel Kishan and Jason Kelly

Sept. 17 (Bloomberg) -- Carlyle Group, the world’s second- largest  
private-equity firm, may buy a stake in a hedge-fund manager and is  
negotiating with several firms as it seeks to add more liquid  
investments, said three people briefed on the plans.

Carlyle is talking to firms including one hedge fund with as much as  
$5 billion in assets that trades across multiple markets, said the  
people, who asked not to be identified because the information is  
private. The firm is also seeking to raise two new debt funds and a $1  
billion pool to buy small companies, the people said.

The biggest private-equity firms are adding more liquid investments  
after the financial crisis sapped investors’ appetites for large  
buyouts. Blackstone Group LP expanded its debt business with the 2008  
purchase of hedge fund GSO Capital Partners LP, and KKR & Co. has  
formed a group to underwrite debt and equity offerings. A previous  
effort by Carlyle to add hedge funds failed in 2008 when the firm  
liquidated a pool hurt by investments in mortgage securities.

The hedge-fund unit and the two new debt funds would be overseen by  
Mitch Petrick, who joined Washington-based Carlyle in March to run  
global credit alternatives and capital markets, said the people.  
Carlyle is targeting $1.5 billion for a new distressed fund and is  
marketing a new vehicle focused on mezzanine debt, said the people.

The distressed fund would top the $1.35 billion size of its 2007  
predecessor fund and pool of $211 million raised in 2004, which has  
doubled in value before fees. The 2007 fund has appreciated 14 percent  
since inception.

Petrick’s Push

Leveraged finance investments accounted for about 16 percent of the  
$90.6 billion the firm oversaw as of June 30, according to Carlyle’s  
website. Since then, Petrick has increased assets in the division by  
adding 11 management contracts on $4.2 billion in collateralized loan  
obligations.

Petrick, Morgan Stanley’s former sales and trading chief, recruited  
David Albertand Rahul Culas from the investment bank’s project and  
structured-finance group to run Carlyle’s mezzanine fund, which will  
specialize in lending to power companies, said one of the people.

The credit crisis forced Carlyle two years ago to shut its only hedge  
fund, a venture it had started in March 2007 with Deutsche Bank AG  
executives Rick Goldsmithand Ralph Reynolds. Assets in that fund had  
dropped by a third to $600 million.

Fund Failures

Another fund, the publicly traded mortgage-bond fund Carlyle Capital  
Corp., was suspended from trading that year after it failed to meet  
more than $400 million of margin calls on mortgage-backed collateral.  
The firm had started the fund less than two years before, hiring John  
Stomber, a former managing director of Cerberus Capital Management LP,  
to head it.

The renewed push into hedge funds and more liquid investments may help  
Carlyle should it decide to sell shares in an initial public offering,  
said Daniel Fannon, a San Francisco- based analyst at Jefferies & Co.

“Investors have more confidence in valuing a more diversified asset  
manager than a traditional buyout business,” Fannon said.

Carlyle hired Rodney Cohen from Pegasus Capital Advisors to run its  
new equity fund, which will make investments of as much as $150  
million, including buying minority stakes. The new fund is an  
extension of the firm’s existing U.S. growth capital business. Those  
vehicles, totaling $1.4 billion and managed by Brooke Coburn, have  
largely replaced Carlyle’s efforts in venture capital, where funds  
make smaller, riskier investments in start-up tech companies, said one  
of the people.

Going Public

Investors have shunned private-equity stocks since Blackstone, the  
largest buyout firm, sold shares three years ago. Blackstone’s IPO  
came just as the credit crisis ended a three-year boom in which $1.6  
trillion in deals were announced, many of which have yet to turn a  
profit.

KKR, which depends on private-equity investments for 66 percent of fee- 
related income, this year completed a three-year journey to list its  
stock on the New York Stock Exchange. Apollo Global Management LLC has  
filed to sell $50 million of stock in an IPO and plans to list  
existing Class A shares on the New York Stock Exchange.

KKR, founded by buyout pioneers Henry Kravis and George Roberts, has  
been building its liquid and mezzanine strategies unit, KKR Asset  
Management, led byWilliam Sonneborn. The division began in 2004 with a  
focus on corporate debt and now oversees about $13 billion, including  
trading in bank and mezzanine loans.

Blackstone has cut dependence on buyouts to 11 percent of fee income  
and now counts its credit and marketable alternatives business, which  
includes a fund of hedge funds operation, as its largest by assets.

To contact the reporters on this story: Cristina Alesci in New York [email-masked] 
; Jason Kelly in New York [email-masked]; Saijel Kishan in  
New York [email-masked]

Last Updated: September 17, 2010 00:01 EDT