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Carlyle proceeds with caution into uncertain environment

  • Carlyle targets $100 bln in fundraising over next few years
  • Approaches investments with caution but stays active
  • Sees strong LP appetite for alternatives

Uncertainty around the Trump administration’s policies has not kept Carlyle Group from deploying capital, senior executives said during the firm’s first-quarter-earnings call.

Some GPs have said anecdotally that the results of the U.S. election have caused deal flow to slow down or have prevented some agreed deals to delay closing.

The value of U.S. leveraged buyouts from Jan. 1 to Jan. 26 was about $1.6 billion across 57 deals, Thomson Reuters said. That’s down from $2.1 billion in 66 deals in the year-ago period.

Carlyle, however, deployed $17.9 billion in 2016 and realized almost $30 billion over the year, the firm said during the Feb. 8 conference call.

Macro factors like the election of President Donald Trump, Britain’s vote to leave the European Union, and high asset prices have caused the firm to be more cautious, said Bill Conway, co-chief executive.

“Right now there’s not much room for error,” Conway said. “In the current environment you have to be extra cautious. … it’s added extra caution as opposed to causing us to not do an investment in a particular market.”

Conway said: “We’re not investing in the U.S. economy or the European economy or even the Spanish economy. We’re investing in a particular company, management team, idea, at a particular time.”

Carlyle executives discussed the uncertainty surrounding the Trump administration and its policies. Any changes to tax reform, for example, won’t come about overnight, said co-CEO David Rubenstein. “We’re cautious but we’re not depending on what Congress is going to do before we make decisions,” he said.

One example discussed was ending the deductibility of interest expense, an idea that was included in House Republicans’ tax reform plan. Deductibility of interest expense is the lifeblood of private equity and some say the PE model of using debt to acquire companies will be broken if the tax treatment changes.

Conway had a different thought. The House tax-reform plan also calls for the deductibility of capital expenditures in the year they were made, which would “overwhelm” in size the deductibility of interest expense, Conway said.

Alongside the uncertainty, institutional investors’ appetite for alternative investments continues strong, Rubenstein said. This is important for Carlyle to meet its goal of raising $100 billion in the next few years.

Two particular types of investors directing more capital to PE are sovereign-wealth funds and high-net-worth individuals, Rubenstein said.

“LPs over the last year or so are saying they’re nervous they’re going to be squeezed out of funds, they won’t be able to get into them and what do they have to do to get into the first close and how much can they get,” Rubenstein said. This dynamic is different from a few years ago, when many LPs would wait until the end of a fundraising, waiting for other LPs to commit, before coming into a fund, he said.

Fundraising for the firm slowed in 2016. Carlyle raised $13.9 billion in gross new capital in 2016 and $8.2 billion on a net basis after redemptions over the year, the firm said in its earnings statement. That’s compared with $22.5 billion in gross new capital raised in 2015, the firm said.

Action Item: Read House Republicans’ tax reform plan here: http://bit.ly/28VOwvf 

David M. Rubenstein, co-founder and co-CEO of Carlyle Group, attends a session at the annual meeting of the World Economic Forum in Davos on Jan. 24, 2014. Photo courtesy Reuters/Denis Balibouse