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Carlyle Said to Seek Stake in Hedge-Fund Firm Amid Buyout Slump
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By Cristina Alesci, Saijel Kishan and Jason Kelly


Sept. 17 (Bloomberg) -- Carlyle Group, the world’s second- largest
private-equity firm, may buy a stake in a hedge-fund manager and is
negotiating with several firms as it seeks to add more liquid
investments, said three people briefed on the plans.

Carlyle is talking to firms including one hedge fund with as much as
$5 billion in assets that trades across multiple markets, said the
people, who asked not to be identified because the information is
private. The firm is also seeking to raise two new debt funds and a $1
billion pool to buy small companies, the people said.

The biggest private-equity firms are adding more liquid investments
after the financial crisis sapped investors’ appetites for large
buyouts. Blackstone Group LP expanded its debt business with the 2008
purchase of hedge fund GSO Capital Partners LP, and KKR & Co. has
formed a group to underwrite debt and equity offerings. A previous
effort by Carlyle to add hedge funds failed in 2008 when the firm
liquidated a pool hurt by investments in mortgage securities.

The hedge-fund unit and the two new debt funds would be overseen by
Mitch Petrick, who joined Washington-based Carlyle in March to run
global credit alternatives and capital markets, said the people.
Carlyle is targeting $1.5 billion for a new distressed fund and is
marketing a new vehicle focused on mezzanine debt, said the people.

The distressed fund would top the $1.35 billion size of its 2007
predecessor fund and pool of $211 million raised in 2004, which has
doubled in value before fees. The 2007 fund has appreciated 14 percent
since inception.

Petrick’s Push

Leveraged finance investments accounted for about 16 percent of the
$90.6 billion the firm oversaw as of June 30, according to Carlyle’s
website. Since then, Petrick has increased assets in the division by
adding 11 management contracts on $4.2 billion in collateralized loan
obligations.

Petrick, Morgan Stanley’s former sales and trading chief, recruited
David Albertand Rahul Culas from the investment bank’s project and
structured-finance group to run Carlyle’s mezzanine fund, which will
specialize in lending to power companies, said one of the people.

The credit crisis forced Carlyle two years ago to shut its only hedge
fund, a venture it had started in March 2007 with Deutsche Bank AG
executives Rick Goldsmithand Ralph Reynolds. Assets in that fund had
dropped by a third to $600 million.

Fund Failures

Another fund, the publicly traded mortgage-bond fund Carlyle Capital
Corp., was suspended from trading that year after it failed to meet
more than $400 million of margin calls on mortgage-backed collateral.
The firm had started the fund less than two years before, hiring John
Stomber, a former managing director of Cerberus Capital Management LP,
to head it.

The renewed push into hedge funds and more liquid investments may help
Carlyle should it decide to sell shares in an initial public offering,
said Daniel Fannon, a San Francisco- based analyst at Jefferies & Co.

“Investors have more confidence in valuing a more diversified asset
manager than a traditional buyout business,” Fannon said.

Carlyle hired Rodney Cohen from Pegasus Capital Advisors to run its
new equity fund, which will make investments of as much as $150
million, including buying minority stakes. The new fund is an
extension of the firm’s existing U.S. growth capital business. Those
vehicles, totaling $1.4 billion and managed by Brooke Coburn, have
largely replaced Carlyle’s efforts in venture capital, where funds
make smaller, riskier investments in start-up tech companies, said one
of the people.

Going Public

Investors have shunned private-equity stocks since Blackstone, the
largest buyout firm, sold shares three years ago. Blackstone’s IPO
came just as the credit crisis ended a three-year boom in which $1.6
trillion in deals were announced, many of which have yet to turn a
profit.

KKR, which depends on private-equity investments for 66 percent of fee-
related income, this year completed a three-year journey to list its
stock on the New York Stock Exchange. Apollo Global Management LLC has
filed to sell $50 million of stock in an IPO and plans to list
existing Class A shares on the New York Stock Exchange.

KKR, founded by buyout pioneers Henry Kravis and George Roberts, has
been building its liquid and mezzanine strategies unit, KKR Asset
Management, led byWilliam Sonneborn. The division began in 2004 with a
focus on corporate debt and now oversees about $13 billion, including
trading in bank and mezzanine loans.

Blackstone has cut dependence on buyouts to 11 percent of fee income
and now counts its credit and marketable alternatives business, which
includes a fund of hedge funds operation, as its largest by assets.

To contact the reporters on this story: Cristina Alesci in New York atCalesci2@bloomberg.net
; Jason Kelly in New York atjkelly14@bloomberg.net; Saijel Kishan in
New York atskishan@bloomberg.net

Last Updated: September 17, 2010 00:01 EDT