- The Washington Times - Thursday, April 24, 2008


It’s been a rough few months for David Rubenstein, co-founder and managing director of Carlyle Group.

As the subprime crisis sent deal-making into a tailspin in August, D.C.-based Carlyle barely saved its buyout of Home Depot Inc.’s contractor supply unit. When banks balked at lending, Carlyle increased the amount of cash it invested and got Home Depot to slash the price 18 percent to $8.5 billion.

In December, unions petitioned regulators to block the investment firm’s $6.3 billion purchase of nursing home chain Manor Care Inc., accusing the firm of focusing on profits to the detriment of patients. Though their effort was unsuccessful, the unions continued to hound Mr. Rubenstein, demonstrating in January at the University of Pennsylvania, where he gave a speech at a private equity conference at the Wharton School.

“For the next year or so, we will be in purgatory,” Mr. Rubenstein told the conference. “We will have to atone for our sins a little bit.”

A few weeks later, Carlyle’s mortgage bond fund paid for the transgression of overleveraging. Carlyle Capital Corp. defaulted on $16.6 billion of debt, after borrowing 32 times its $670 million of equity capital nine months earlier to invest mainly in AAA-rated mortgage securities.

Carlyle, which has 60 funds owning $81.1 billion in assets, can withstand the $150 million loss from the Carlyle Capital failure. More severe was the damage to its reputation for giving investors stellar returns: an average of more than 30 percent annually since its founding in 1987, according to the company.

“They tripped, and they tripped in public,” said Paul Schaye, managing director of New York-based Chestnut Hill Partners LLC, which helps private equity firms find investments. “That hurts the brand.”

Carlyle’s woes reflect those of the whole private equity industry. After low interest rates and a booming stock market fueled record deal volume in 2006 and ‘07, the pace of buyouts has screeched to a halt. The subprime crisis, rising interest rates and a shrinking appetite for stock offerings have choked off the industry’s main sources of profit.

As banks balked at extending credit, announced buyouts globally plummeted 63 percent in the second half of 2007 to $200.8 billion from $542 billion in the first half, according to data compiled by Bloomberg.

“You don’t see the banks interested in getting into the syndicates,” said Susanne Forsingdal, a partner at Copenhagen- based ATP Private Equity Partners, which manages about $4.75 billion. “That model is broken.”

The slump worsened in the first quarter, when $60.7 billion of deals were announced globally — down 70 percent from $200 billion a year earlier. Carlyle’s total plummeted to $568.6 million in the first quarter, an 86 percent drop from $4 billion a year earlier.

“The Greek gods reminded us that Golden Ages end, and not always happily,” Mr. Rubenstein said in a talk at a private-equity conference in December in Dubai, where Carlyle set up an office last year.

Buyout firms are also finding that the traditional exits for their investments — stock offerings — have slammed shut. In the first quarter of this year, initial public offerings and stock sales fell 38 percent to $73.3 billion.

Carlyle is counting on its head start in international markets to help it weather the turbulence. Mr. Rubenstein predicts that within five years, about two-thirds of the firm’s investments will be in non-U.S. companies. Currently, 64 percent is in North America.

Carlyle itself has been hit by the markets’ edginess. Last year, it postponed plans to sell shares in itself via an IPO. Instead, the firm worked its long-standing connections in the Middle East: Mubadala Development, an arm of the Abu Dhabi government, bought 7.5 percent of Carlyle for $1.35 billion in September.

More trouble could be brewing for private equity if a Democrat wins the U.S. presidential election. Candidates Barack Obama and Hillary Rodham Clinton have both said they favor treating carried interest, the profits private equity partners take when they sell an investment, as ordinary income rather than capital gains. That means it would be taxed at a 35 percent rate rather than 15 percent.

To continue attracting investors, Carlyle needs new markets. Last year, Carlyle began raising a $750 million Middle East fund — its first — that aims at taking stakes in local family-owned companies or conducting buyouts.

In November 2006, Mr. Rubenstein hired Paul Bagatelas, formerly a director at Credit Suisse Group in Dubai, as a managing director to run the Dubai office, adding to regional outposts in Cairo and Istanbul. Mr. Rubenstein said contacts lead to deals. “Woody Allen said that 80 percent of success is showing up,” he noted. “The fact that I’m showing up and showing my respect may make it easier to do business.”

Even when he finds a transaction, completing it will take time. “There will be hair on these deals,” said Peter Baumbusch, a partner with the law firm of Gibson Dunn & Crutcher LLP in Dubai. “It won’t be the simple deals that happen in the U.S.”

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