Tale of the Tape: ‘The Great Recession Put Carlyle to the Test’

The Carlyle Group is the first major private equity firm to release its 2009 annual report – we hope Apax Partners and Blackstone Group are just dotting their “i”s, ahem – and it provides the first public look at how one of the giants of PE fared through the worst recession in decades.

Well, according to Carlyle Group CEO David Rubenstein, these wacky kids did just fine:

“In 2008 and early 2009, we witnessed a tectonic shift in the way private equity operates – deals were fewer and smaller; equity was up and debt down; fundraising was difficult; distributions were minimal; and full exits were scant. But in the latter half of 2009, fear gave way to cautious optimism, allowing us to deploy $5.2 billion in equity around the world. With an unrelenting emphasis on capital preservation, we worked with our 260 portfolio companies to ensure virtually all survived the downturn. The Great Recession put Carlyle to the test. We are humbled and grateful to be able to say that we passed that test in service to our investors.”

Does Carlyle deserve a passing grade? Our perusal of the new report and its predecessor show that it did. In 2009, a year with no appreciable exits and only the tiniest equity investments, Carlyle seems to have responded by trimming its infrastructure and focusing on fundraising: It cut back on staff and investment professionals, for instance, and closed over seven new funds.

Nothing tells the story like a direct comparison, however. Below, peHUB’s tale-of-the-tape breakdown of Carlyle in 2008 and 2009.

2008: “The Road Ahead,” besuited man striding on wave-patterned cobblestones. “The road isn’t always straight and flat. Steep hills and unexpected curves are part of the journey.” Ahem moment (a factoid that’s often repeated in the report): $3.3 billion of Carlyle’s own employee money invested in its buyout funds.
2009: “One Carlyle,” with image of planet Earth hanging forlornly in the middle of a blue page. Puzzle pieces as a leitmotif throughout. Ahem moment: $33.5 billion of dry powder.
Change: Zooming out from tiny cobblestones last year to a giant planet Earth this year, Carlyle is focusing on its global presence when the U.S. looks particularly weak. The “dry powder” number, mentioned several times in the 2009 report, plays the firm’s younger funds and massive investment kitty as a virtue – when often too much “dry powder” throws LPs into a panic about seeing timely returns.


2008: “900 professionals in 20 countries manage $85 billion in 64 funds across three asset classes (corporate private equity, leveraged finance/distressed and real estate)”

2009: “860 professionals in 19 countries manage $88.6 billion in 67 funds across three asset classes (private equity, real estate and credit alternatives)”

Forty fewer professionals, one less country, three more funds, $3.6 billion more under management, same number of asset classes.


2008: 480 investment professionals in 20 countries

2009: 420 “outstanding” investment professionals in 19 countries

Change: 60 fewer investment professionals (though perhaps more outstanding); one less country.


2008: Report mentions under “major achievements” the close of Carlyle Partners V, $13.7 billion ; Carlyle MENA Partners; $500 million; Carlyle Europe Technology Partners at €530 million – all of which actually closed in early 2009.

2009: “In 2008 and early 2009, despite the challenges in the markets, Carlyle raised $19.9 billion in new capital to deploy. This includes final closes on 10 funds, including Carlyle Partners V, L.P. at $13.7 billion; Carlyle Europe Technology Partners II, L.P. at €530 million; Carlyle MENA Partners, L.P. at $500 million; Carlyle Europe Real Estate Partners III, L.P. at €2.2 billion; Carlyle Mezzanine Partners II, L.P. at $553 million; Carlyle Strategic Partners II, L.P. at $1.35 billion; our thirteenth and fourteenth U.S. loan funds at $500 million and $80 million; and two European loan funds at €1.5 billion and €401 million…$33 billion in dry powder… Of our 20 funds that are currently active in their investment periods, 11 have deployed less than a third of their committed capital.”

Despite a little double-counting, 2009 was clearly a productive fundraising year for Carlyle; there’s all that “dry powder,” after all.


2008: 1,300 investors from 68 countries; 37% Public Pensions & Agencies; 33% Financial Institutions; 15% High Net Worth; 8% Corporate Pensions 4% Foundations & Endowments; 3% Corporations; $3.3 billion from Carlyle’s own employees

2009: 1,300 investors from 72 countries; 37% Public Pensions & Agencies; 33% Financial Institutions; 15% High Net Worth; 8% Corporate Pensions 4% Foundations & Endowments; 3% Corporations; $3.8 billion from Carlyle’s own employees

Same number of investors, same types of investors, but you’ll notice that they are spread over five more countries. That’s probably a result of more global fundraising efforts in 2009. Since the number remained static while more countries were added, it also likely means that Carlyle must have lost some old investors who were replaced by new ones during the fundraising cycle. Carlyle employees put in $500 million of their own money into the firm’s funds over 2009.


2008: $54.6 billion of equity invested in 896 transactions

2009: $59.6 billion in 952 corporate private equity and real estate transactions; in 2009, “$2.7 billion in 47 new corporate and real estate transactions with a cumulative enterprise value of more than $4.4 billion.”

Roughly $5 billion committed over the year in 56 transactions, and about half of that in a whopping 47 “corporate and real estate” investments. (That means that the remaining $2.7 billion were invested in Carlyle’s two other categories, “growth equity” and “distressed,” which includes leveraged finance and distressed credit.) Any way you slice it, that’s a lot of teensy equity checks in corporate private equity and real estate.


2008: Energy & Power, 22%; Real estate 19%; Tech and business services 15%; Consumer & retail 8%; Industrial 8%; Telecom & Media 6%; Transportation 6%; Healthcare 6%; Aerospace 5%

2009: Mostly the same except: Industrial 9%; Healthcare 5%; Aerospace 4%

Not much. Slightly more heavyweight in industrials and healthcare; slightly under in aerospace, but we’re talking about only one percentage point either way.


2008: “In March 2008, Carlyle Capital Corporation (CCC), which invested primarily in AAA mortgage-related securities issued by government-backed agencies, was placed into liquidation; In July 2008, we commenced an orderly liquidation of Carlyle Blue Wave (CBW), our multi-strategy hedge fund; In November 2008, we took additional steps to balance our firm’s cost structure with the current investment climate. This included making targeted staff reductions across various parts of the firm, closing several offices and suspending two new investment initiatives—a Central and Eastern Europe fund and an Asia Leveraged Finance fund; three portfolio companies filed for bankruptcy protection or entered administration: Edscha, a German auto parts manufacturer acquired by Carlyle Europe Partners, L.P. in 2003, sought bankruptcy protection after succumbing to the combination of a global economic downturn and an ailing automobile industry. SemGroup, a midstream oil and gas logistics and marketing company, was brought down during a period of unprecedented volatility in the price of oil. Hawaiian Telcom, a full-service telecommunications provider in Hawaii that Carlyle Partners III, L.P. acquired in 2005, filed for Chapter 11 bankruptcy protection in late 2008 after significant operational setbacks and stiff competition in an increasingly difficult economic environment.”

2009: “In our European portfolio, both IMO Car Wash and Edscha went into administration. Our investment in IMO Car Wash resulted in a complete write-off; while we received almost 30% of our investment in Edscha from a dividend recapitalization a few years ago. In Japan, Willcom filed for bankruptcy.

2008 was clearly a rough year, and perhaps rougher than 2009. Edscha, which was mentioned both in 2008 and 2009, shows the power of the dividend recap.


2008: Kuhlman Electric, sold for 9.3 times invested equity after holding it for nine years; Transics International, IPOed in 2007 and fully exited in 2008 at 4.2 times invested equity; WCI Cable, sold for 3.2 times invested equity after being acquired out of bankruptcy in 2001.

2009: IPOs: China Forestry Holdings for gross proceeds of $200 million, China Pacific Insurance Co., which raised $3.1 billion; Concord Medical Services Holdings, which raised $132 million; Kaisa Group Holdings, which raised $445 million; Connecticut-based SS&C Technology Holdings, which raised roughly $160-million.

No sales (and thus, no exits) to speak of in 2009. Carlyle pushed through four IPOs of Chinese companies and one IPO of a Connecticut-based financial services software provider. The upshot is that Carlyle is laying the pipe for future exits, particularly in its global portfolio, but didn’t have any luck during 2009 actually getting its money back in the United States.


2008: Shut down Carlyle Capital Corporation, a two-year-old affiliate that defaulted on $16.6 billion of residential mortgage-backed securities around the time of the fall of Bear Stearns.

2009: “We also took advantage of dislocated markets through our significant purchases of residential mortgage-backed securities (RMBS). Where others saw obstacles, we saw opportunity, purchasing more than $500 million of RMBS during the 12 months ended December 31, 2009.” Carlyle made the investments through a joint venture with Falcon Bridge Capital.

If at first you don’t succeed, buy, buy RMBS again (albeit in much smaller amounts).


2008: “Carlyle has invested in 414 properties around the world with a total capitalization of $36.2 billion, completed 163 full or partial realizations, and returned $4.9 billion to investors.”

2009: “Carlyle has invested in 423 properties around the world with a total capitalization of $37.4 billion, completed 168 full or partial realizations, and returned $5.0 billion to investors.”

Nine more properties invested, five more realizations, and $100 million returned to investors.


2008: Carlyle launched four Europe and U.S. leveraged finance funds in 2008, in addition to closing a second mezzanine fund in early 2009. Carlyle counted 22 leveraged finance funds. U.S. leveraged finance managed about $4.8 billion, mezzanine managed about $980 million and the European group managed about 5.4 billion euros in nine funds. There was also Carlyle Credit Partners, or CCP, which spent most of 2008 “restructuring mark-to-market liabilities” by replacing short-term debt that faced mark-to-market triggers with longer-term financing.

2009: In early 2009, Carlyle combined its Europe leveraged finance, U.S. leveraged finance and mezzanine businesses into one business headed by Mike Ramsay, who formerly headed the European leveraged finance business. In early 2010, Michael “Mitch” Petrick took over the Global Credit Alternatives business. “Carlyle’s structured credit group invests primarily in performing senior secured bank loans through collateralized loan obligations and synthetic structures. The group manages 18 vehicles in Europe and the United states, accounting for more than $10 billion in assets under management. In 2009, Carlyle’s structured credit funds saw dramatic improvement from the 2008 lows, with many funds making distributions to equity investors.”

Carlyle’s big jump into collateralized loan obligations, or CLOs is the biggest one. (And it’s an industry trend.) Carlyle previously had its Carlyle Credit Partners fund, which grew in size when Carlyle bought Stanfield Capital Partners in April 2010 with $5.1 billion under assets.

“We are bullish on emerging markets, particularly China, India and Brazil, which have experienced a rapid rebound in economic performance driven by strong fundamentals. We believe there will be terrific, targeted opportunities in our home market, the United States….Our global Financial services team continues to identify ways to participate in this restructuring and recapitalization, and we expect their efforts to generate strong returns. The global energy and U.S. healthcare sectors also remain attractive arenas for future investment. We believe that the European recovery will lag that of Asia and America.”