As layoffs have spread across banking, investment banks and hedge funds, things have been fairly quiet for private equity firms. Then again, these operators tend to have small employee bases.
But, interestingly enough, we may be finally seeing some pink slips for the private equity folks. According to The Wall Street Journal, 3i will announce a 15% cut in its staff and that there will be a 19% cut at American Capital.
And now it looks like the tier-1 firms are not immune. The Carlyle Group is gutting 10% of its staff this week (which comes to about 100 people). There's not much deal-making to do right now. Besides, it looks like it will be tougher for private equity firms to raise new capital. If anything, the focus will be on trying to manage the existing portfolios.
What's more, Carlyle has had a variety of blunders. There was the implosion of its mortgage fund (Carlyle Capital) and the recent bankruptcy of its Hawaiian Telecom holding.
Of course, Carlyle is not alone. So, it's a good bet we'll start seeing more layoffs in the private equity world.
Private equity powerhouse, The Carlyle Group, has more than 500 investment professionals across 21 countries. Of course, some of them are corporate luminaries like Louis Gerstner.
Well, after being the chairman of Carlyle since 2003, he is now departing -- his last day will be September 30th. Although, he will remain as a Senior Advisor to the firm.
Gerstner has had a stellar career. In 1993, he took the challenge of becoming IBM's (NYSE: IBM) chairman. At the time, the company was crumbling.
Before his tenure at IBM, Gerstner was the CEO of RJR Nabisco, where he had to deal with the debt-load from a mega leveraged buyout (from KKR). He was also the president of American Express (NYSE: AXP) and a director of management at McKinsey & Co., Inc.
While at Carlyle, Gerstner made a big impact. He helped globalize the firm as well as diversify the investment base. As of now, Carlyle manages about $75 billion in assets across 57 funds and controls a portfolio that has aggregate revenues of $87 billion.
As seen recently with the quarterly reports of the Blackstone Group LLP (NYSE: BX) and Fortress Investment Group (NYSE: FIG), the private equity world is having a hard time exiting investments. As a result, its returns are fairly muted.
That's why the recent announcement from the Carlyle Group is important. That is, the firm has sold John Maneely Co. to Novolipetsk Steel, Russia's #4 steel maker, for $3.53 billion.
Essentially, Novolipetsk sees this deal as a way to bolster its presence in the US market, especially in the pipe and tube markets. In fact, such things are fairly profitable because of recent shortages, largely due to energy costs.
As for Carlyle, the deal is a nice score. After all, the firm invested $550 million in 2006 for several companies which ultimately turned into John Maneely. This transaction will also be lucrative for a group of investment banks -- like Merrill Lynch (NYSE: MER), Deutsche Bank and Societe Generale -- that will provide the necessary debt financing.
When the Carlyle Group got its start in the late 1980s, the founders leveraged their extensive political backgrounds. It was certainly smart as the private equity firm struck some key deals (especially in the defense area).
Well, Carlyle is using its political savvy once again. This time, the firm wants to take advantage of the distressed valuations in the banking sector.
Basically, there is a complex set of regulations that make it extremely difficult for private equity firms to invest in banks. For example, there is an equity cap of 25% (which is often lower if the private equity firm wants more control).
So, in the Wall Street Journal, the Carlyle Managing Directors, Olivier Sarkozy and Randal Quarles, weighed in with an opinion piece.
The essential argument: the regulations are outmoded.
In fact, the rules may make our financial system weaker since there is tougher access to much-needed capital. After all, it seems that every day there is another bank that needs huge amounts of capital.
No doubt, Carlyle is being self-serving, and it will probably make a fortune from the regulatory changes.
At the same time, capitalism can be a powerful tool, and as a result, move things in the right direction. With $400 billion available in the coffers of private equity funds, this could be a big help to repair the big problems in the banking sector.
Interestingly enough, the issue appears to have some traction. According to a recent Wall Street Journal story, it looks like the Federal Reserve is thinking about relaxing some of the rules.
About a year ago, the rage in private equity was the so-called megabuyout. It seemed like no company was immune. There was even talk of $100 billion dollar deals.
Of course, the credit crunch ended the megabuyout. In fact, it ended most of the activity for private equity folks.
Yet, according to the co-founder of the Carlyle Group, David Rubenstein, things are perking up [subscription required]. His firm – like other veterans, such as The Blackstone Group (NYSE: BX) – understands market cycles. After all, these players have dealt with variety of credit crunches, such as in 1991-1992, 1998 and 2001-2002.
Rubenstein predicts we'll see a pick-up in deals over the next few months. Although, the deals are likely to range from $2 billion to $4 billion, with less debt. And expect more foreign deals.
Funny enough, Rubenstein seems to be leading the charge with its recently announced a $2.54 billion deal for a majority stake in Booz Allen Hamilton.
Well, this may have been the start of a trend. For example, the co-founder of the Carlyle Group, David Rubenstein, is also talking up financials.
He even said the sector was the "single biggest opportunity," at least in the U.S.
Hey, private equity firms certainly have an intimate understanding of financials. After all, both have been partners in many deals over the years.
Plus, as seen with Citigroup (NYSE: C) – which recently announced it is issuing $3 billion in equity – it looks like the balance sheets are still iffy.
Rubenstein thinks that there are many mid-tier financials that present great opportunities for value as well. And, with over $80 billion in assets under management, Carlyle certainly has some firepower to get some of these deals done.
Tom Taulli is the author of various books, including The Complete M&A Handbook (www.mergerbook.com) and is also a principal in Averiware, which provides an ERP system to small and midsize businesses.
Not that long ago, the private equity folks were often called "masters of the universe." Actually, based on the compensation structure, it seemed that they could buy the universe, several times over.
Private equity firms were able to exploit market efficiencies as well as get access to cheap capital. And something else: they had the benefit of focus.
But over the past few years, some of the top private equity firms have diversified into other categories, such as hedge funds, venture capital and real estate. With a strong platform – and lots of capital – it seems like a no brainer. Right?
Well, reality has been much different, at least according to a recent piece in The Wall Street Journal. Just look at the Carlyle Group and KKR. Essentially, both firms are getting whacked by their exposure to the mortgage sector.
In fact, Carlyle's mortgage entity – Carlyle Capital Corp., which is traded on the Euronext Amsterdam exchange, has defaulted on some of its loans, even though they are high-quality offerings. Now we know that the firm ramped its leverage ratio over 30X!
As for KKR, it has its own debt vehicle – called KKR Financial Holdings (NYSE: KFN) – which is suffering from "high quality" mortgages.
If anything, these forays have become major distractions -- not to mention being big reputational hits.
I suspect that diversification is likely to be a strategy that gets much less emphasis going forward.
There's a lot of talk about how bad things are for private equity these days. Deals are going bust and credit is drying up, and some observers have suggested that the golden age of private equity is over.
But Louis Gerstner, the chairman of the Carlyle Group, told the Dow Jones Private Equity Analyst Outlook conference in New York that he rejects all the doom and gloom. As far as Gerstner is concerned, the current situation is not a crisis. It is merely a "correction," and a welcome one at that. Capitalism tends to go to extremes, and the slowdown in the buyout market is simply a cleaning up period when the excesses can be eliminated.
Gerstner said that Carlyle is holding $30 billion waiting for investment. Weaker players should leave the field this year and next, creating new opportunities for massive, experienced funds like Carlyle. The developing world is also attractive, providing targets that require less leverage. Read more at Financial News. Read more at DealBook.
David Rubenstein of the Carlyle Group was scheduled to speak at the Wharton Private Equity Forum in Philadelphia this morning, but his speech was interrupted by protesters from the Service Employees International Union. Eventually, the Philadelphia police arrived and 'escorted' the protesters away.
The protest was inspired by Carlyle's purchase of Toledo-based ManorCare, the largest chain of nursing homes in the U.S. (There's a photo of the protest over at DealBreaker, featuring a large banner that was unfurled at the conference, reading "Carlyle: Fix Manor Care nursing homes! NOW.") A flier handed out by the SEIU at the protest asked Carlyle to "Put People Above Profits." Seems that the union suspects that Carlyle might try to make money through other people's suffering -- and indeed make some people's suffering worse in the pursuit of profits.
The union's website dedicated to Carlyle and other private equity big shots states that it is "concerned that Carlyle's business practices may put everyday Americans at risk by endangering public services, imperiling the environment, jeopardizing the health of vulnerable senior citizens, and supporting human rights abuses abroad." Of course, SEIU is not alone is these concerns. Some Democrats have called for Congress to investigate the situation.
Apparently, Rubenstein was initially shocked by the protest, but recovered in time to mock the protesters' proletarian language skills, urging one woman to "take a remedial course in English before you go any further." His speech eventually got under way, and in it he admitted that the image of private equity is now "tarnished." But private equity is about to enter a new golden age -- actually, a "platinum age," as he called it -- and as long as private equity firms can do a better job at promoting themselves and doing things like giving generously to charity, all should be well. After all, capitalism is a "combat sport." An interesting sport, though, that requires police intervention to protect one side against the other.
Since the early 1970s, the Apollo Group (NASDAQ: APOL) has transformed the private education business. The company not only has a broad network of campuses called the University of Phoenix, but also a thriving online education system.
As seen with yesterday's fiscal Q1 results, Apollo is continuing to grow at a nice clip. Net income increased 23% to $139.9 million, or $0.83 per share. Revenues were up 17% to $780.7 million.
Apollo got a boost from enrollments, which increased 11% to 325,000. But the company has also made important strides with student retention as well as the quality of the curriculum.
True, there are worries about the credit crunch. Just take a look at school loan provider Sallie Mae (NYSE: SLM), which plans to pull back somewhat.Yet, Apollo has anticipated some of this and has tried to reduce its reliance on private student lending.
In terms of expansion, Apollo recently struck a $1 billion joint venture with the Carlyle Group. The goal is to make investments in educational organizations outside the US. In other words, it's a good bet we'll see some deals in 2008.
A good sign of a bottom in an industry or market is when private equity firms start to get interested. LBO interest indicates that the stocks are so beaten down that some very smart people think they can use debt to buy the entire company, and then use the company's cash flow to service it.
Now the Carlyle Group, the famed private equity firm that was among the first to spot signs of trouble in credit is "getting close" to buying up beaten-down financials. According to the Wall Street Journal, "In July, the firm hired Edward "Ned" Kelly, former chief executive of Mercantile Bankshares Corp., to head a new, 10-person team to look for financial-services deals. His focus includes distressed businesses where a jolt of Carlyle capital could help mend things. He also is watching big, integrated financial-services companies that may need to divest themselves of solid subsidiaries to raise cash in a hurry."
KKR has also expanded its team looking at financial services stocks. Should ordinary investors follow suit? I'm not so sure. There are tremendous transparency problems associated with the sector, as the wave of surprise subprime writedowns showed. It's hard to do securities analysis to determine if a stock is a good value when the financials aren't reliable.
You might miss out on a great buying opportunity by waiting for more information and disclosure, but that's a price I'm willing to pay. Buying companies with financials you don't really understand isn't value investing: It's speculating.
Dow Jones' Financial News is reporting that a new hedge fund run by The Carlyle Group lost about 10% of its value in October. The loss was suffered by The Carlyle Multi-Strategy Master Fund, which was launched just this past May.
The Multi-Strategy Master Fund is Carlyle's first hedge fund. It had an opening value of $700 million, and is reported to have made only 1% through September. Although November figures were not made available, the 10% loss in October would mean the fund was down for the year.
The Financial News points out that overall, the hedge fund industry earned nearly 3% in October. Rumors suggest that unplanned redemptions have been harming the performance of Carlyle's fund, which includes among its managers Scott Davidson, who once worked as a trader at Amaranth Advisors. Amaranth collapsed spectacularly in September of 2006.
Blackstone Group (NYSE: BX), a global alternative asset manager and provider of financial advisory services, closed at $25.95 Thursday. BX priced 133.33 million shares at $31 on 6/21. BX traded at its record high of $38 on its first day of trading on 6/22. The Carlyle Group LP, a global alternative asset manager, sold a 7.5% stake to an investment arm of the Abu Dhabi government for $1.35 billion, indicating Carlyle might be institutionalizing in an attempt to reach out to public investors. BX October option implied volatility of 39 is below its 10-week average of 45 according to Track Data, suggesting decreasing risk.
Fortress Investment (NYSE: FIG), a global alternative asset manager with approximately $43.3 billion in assets under management, closed at $20.67 Thursday. FIG will pay a cash dividend of $0.225 per class A share for the quarter ending 9/30/07. FIG October option implied volatility of 55 is above its 26-week average of 49 according to Track Data, suggesting larger risk.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
There have been so many stories in the news lately pointing to a downturn in the private equity boom that I worry about getting repetitive in covering them. But here's a new one for today: Carlyle Capital, a fund being floated by the famed Carlyle Group, confirmed that it will price shares at around $19, down from the previously announced range of $20-$22.
Carlyle hopes to raise about $300 million on the Euronext to invest in products including residential mortgage-backed securities and corporate loans.
The unimpressive demand can be attributed to continuing concerns about the lending market, but I also suspect that investors just aren't finding the big private equity firms as exciting as they did, say, six months ago. Shares of The Blackstone Group (NYSE: BX) have performed poorly since their debut last Friday, hitting a new all-time low today of $28.75, and finishing the day at $29.27, down 1.41%.
There have been continuous rumors that other private equity firms were mulling IPOs but given the lackluster IPOs thus far, it seems likely that the talk could start to die down. On the other hand, some insiders may want to cash out before more investors turn against them.
General Motors, in its current "cut-costs-and-return-to-consistent-profitability mode," has decided to sell its Allison vehicle transmissions unit to private equity firms The Carlyle Group and Canada's Onex Corporation for a cool and needed $5.6 billion.
GM's Allison unit makes transmissions for buses and fire trucks (read: large vehicle transmissions) and has about 3,400 employees, with annual sales of about $2.2 billion. Annual profit? A healthy $338 million.
GM needs a decent infusion of cash to pay for employee position cuts (yeah, that's right) as well as tie up ongoing plant closings and prepare for what is left in that vein. Additionally, GM's new model launches need a little panache to get consumers paying attention to something other than Toyota and Ford, and some of this cash will most likely be wisely used for marketing.
As a result of the announcement, GM shares rose to their highest level in almost 2 1/2 years; the proceeds will be added to the $16 billion GM already has built since 2005 on the backs of asset sales, union worker buyouts and factory closings. GM needs all the money it can to radically reshape its operational and corporate landscape, and this new dollop of money on top of the existing pile should provide a decent cushion for CEO Rick Wagoner's continuing efforts.
What will GM use the cash for, outside of restructuring costs? Most likely, some of the existing cash horde is already being used to expand its electric and hybrid vehicle technology so that GM can have a piece in the growing area of alternative propulsion methods outside of gas-powered vehicles. Its "Volt" product is probably the first of that effort, and if GM is serious about providing vehicles with the efficiency that gas engines alone just cannot provide, perhaps this cash will be nicely used for that purpose.
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As layoffs have spread across banking, investment banks and hedge funds, things have been fairly quiet for private equity firms. Then again, these operators tend to have small employee bases.
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As seen recently with the quarterly reports of the 
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About a year ago, the rage in private equity was the so-called megabuyout. It seemed like no company was immune. There was even talk of $100 billion dollar deals.
Private equity powerhouse 
Not that long ago, the private equity folks were often called "masters of the universe." Actually, based on the compensation structure, it seemed that they could buy the universe, several times over.
Since the early 1970s, the 
Blackstone Group
