Carlyle Reaches Out To Nervous Investors

By Thomas Heath

Carlyle Group, the private equity giant headquartered in Washington, this week held its first-ever conference call with more than 400 nervous investors to help manage their expectations during the current financial upheaval.

The firm's troika of co-founders, Bill Conway, Dan D'Aniello and David Rubenstein were all on the call from the Washington office on Monday. There were other members on the staff as well. Questions were taken by e-mail prior to, and during, the call.

Conway, who chairs Carlyle's investment committee, told investors that they would likely not see any cash distributions on their investments any time in the near term, according to Carlyle spokesman Chris Ullman and others familiar with the call.

Carlyle held the call "to demonstrate that we understand what is happening and we are taking good care of our portfolio. We are looking for choice investment opportunities in the midst of this market tumult."

As one highly-placed member of the firm put it, the country is in the midst "of a 100-year flood" and Carlyle wanted to calm nerves.

Full disclosure: Henny Sender, the private equity reporter for the Financial Times, broke this story in this morning's edition.

Conway has said more than once over the past few months that he expected fewer but "more spectacular deals" in the current environment. He also has said during interviews that there were no proposals that he regrets passing on.

He has told people in the firm that asset prices currently are low, but he expects them to go much lower. That's when Carlyle may pounce. The firm has $86 billion in cash - dry powder as the PE crowd likes to call it - ready to be put to use.

Many of those investors, such as high-net worth individuals, are squeezed from many sides right now. Thus, some investors would rather not get a "cash call" from Carlyle in the immediate future asking them to fulfill their commitment and pony up cash so Carlyle can make an acquisition.

Ullman said no one has refused a cash call, but Rubenstein told investors who were listening that Carlyle would work with them so there is no default.

"The issue was raised prospectively," Ullman said.

Under its business model, private equity firms raise cash from investors and then use that cash to make deals as they present themselves. Private equity firms generally buy and hold companies between two or three years or up to 12 years, selling them at a higher price and giving money back to investors.

The current credit crisis has caused some assets to become cheaper. But that works two ways. For Carlyle, it may present more attractive opportunities. On the other hand, the companies it sells may not get the price Carlyle was hoping to get. So the company said it is waiting for better times.

In recent weeks, according to Carlyle insiders, Conway ordered his teams to pore over every deal that the company has on its books, not only to look for possible landmines but also to put a value on those deals. Carlyle told investors on Monday's call that the comany was valuing its equity investment in semiconductor company Freescale, which was bought for $17 billion, at 50 cents on the dollar and its investment in HD Supply, a former Home Depot affiliate, at 85 cents on the dollar.

The slowing economy and consumer spending could wreak havoc on the home improvement sector, which in turn could pressure Carlyle's $8.5 billion acquisition of HD Supply.

People both inside and outside the firm have said that the Freescale deal could turn out to be a disaster.

While there may be fewer deals, Carlyle is trolling the bruised financial sector, looking for bargain-basement prices, according to Carlyle insiders who declined to speak for the record because they are not authorized. Carlyle made a relatively smallish deal last July in Boston Private Financial Holdings, Inc.

Look for more, and bigger deals by Carlyle in the financial sector.

By Tom Heath  |  November 5, 2008; 3:06 PM ET  | Category:  Value Added
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