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Date Posted: 14:40:59 03/10/08 Mon
Author: Bobcat
In reply to: Wildcat 's message, "THE CARLYLE GROUP: Birds that Drink from Cesspools" on 03:12:25 03/10/08 Mon

March 7, 2008


By Henny Sender in New York, The Financial Times

When Carlyle Group established its now struggling mortgage-backed fund and decided to list it, last year, it seemed like a smart and even risk-free thing to do. Today, with the credit markets in full meltdown, that plan seems both arrogant and hazardous.

The private equity firms were the most powerful players in capital markets across the globe and were buying up ever bigger public companies. Carlyle’s co-founder David Rubenstein appeared at conferences, predicting that $80bn-$100bn buy-outs would soon be possible.

Investors were throwing money at private equity firms. They, in turn, were keen to attract as much of that money as possible because many of the leading private equity groups were considering plans to go public and part of the dynamic was to have size and scale, which meant having as many assets under management and collecting as many fees as possible.

Carlyle marketed its mortgage-backed fund to the investors in its flagship buy-out funds as a safe place for them to park their cash, while waiting to write cheques for deals, such as the $15bn purchase of Hertz....

Only a careful read of the offer memo would have informed would-be investors that the fund had the ability to use borrowed money ... and plenty of it – more than 90 cents on the dollar.

That in turn exposed the fund to twin risks. If there were losses in the value of the debt, those losses would be magnified by the use of leverage. Secondly, the fund was exposed to the risk that skittish banks might one day cut back credit lines.

That second fear appeared remote even eight months ago, when the fees the private equity firms paid Wall Street were measured in the hundreds of millions of dollars, making the buy-out groups the banks most lucrative customers. That the banks would dare to stand up to these powerful clients seemed inconceivable.

Today, however, after the market capitalisation of most banks has been halved, and with their own backs to the wall, those same banks are in a very different position.
“There comes a time when the banks have to ask our clients to live up to their side too,” says the head of the group which deals with private equity firms at one major US bank. There are only so many times the banks can forestall or turn a blind eye. They have to say you put up the margin or we are taking the collateral.”

Today both the Carlyle fund and a similar Kohlberg Kravis Roberts* fund are in bad shape, introducing a rare bout of humility for the two firms which launched them. Private equity firms such as TPG, which refrained from such diversification and looked ultra-conservative in 2007, now look far less tarnished by contrast.

It is likely that the equity of Carlyle’s fund will be wiped out and that if the financing evaporates, Carlyle will be forced to liquidate the fund. In a release on Friday, Carlyle noted “additional margin calls and increased collateral requirements could quickly deplete its liquidity and impair its capital”.

Copyright The Financial Times Limited 2008

*See: http://www.kycbs.net/KKR.htm

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