Carlyle Lags Blackstone in Moving Beyond Leveraged Buyouts
Sept. 7 (Bloomberg) -- Carlyle Group LP disclosed in a filing to go public how much it has trimmed its reliance on corporate buyouts and how far it has to go to catch Blackstone Group LP in the race among private-equity firms to diversify.
Funds investing in real estate, infrastructure and energy accounted for about 17 percent of profit in the first half, up from 9 percent in all of 2010, Washington-based Carlyle said yesterday in the registration statement for its initial public offering. The unit that runs hedge funds and structured-credit funds generated 14 percent of earnings in the first six months.
Carlyle derived almost 70 percent of its profit in the first half from its mainstay business of buying and selling stakes in companies, more than double the amount at New York- based Blackstone, the world's biggest private-equity firm by assets. Stock-market investors prefer more predictable sources of income, pushing both firms, along with KKR & Co. and Apollo Global Management LLC, to expand beyond debt-financed acquisitions of companies.
"The rules of the game are about generating stable and attractive cash flow going forward," said Oliver Gottschalg, associate professor of strategy and business policy at HEC School of Management near Paris. "It means some level of diversification to make sure they are not overly reliant on one specific asset class."
Carlyle increased assets under management to $107 billion as of June 30 from $16 billion at the end of 2003, according to the filing with the U.S. Securities and Exchange Commission. In July it completed the purchase of AlpInvest Partners NV, boosting assets to $153 billion and adding another new business: private-equity funds of funds, which invest money for clients in third-party managers.
Blackstone Hedge Funds
Blackstone oversaw $159 billion as of June 30 across all its units. Co-founder Stephen Schwarzman has pulled in new assets through businesses such as hedge funds of funds, which managed $40.6 billion as of June. The unit had $500 million in 2001, Schwarzman said in July.
At Blackstone, private equity accounted for 31 percent of the firm's profit in the first six months of the year, trailing real estate's 56 percent share. The real estate profit was inflated in part by an accounting provision that required Blackstone to recognize some unrealized gains on investments.
Still, Blackstone has been the most successful in moving past leveraged buyouts. The real estate division is raising a new $10 billion fund. The firm also has bulked up its debt and loan businesses, anchored by the GSO unit it acquired in 2008. Blackstone had $33.8 billion in assets in the credit unit as of June.
KKR Efforts
At KKR, co-chairmen Henry Kravis and George Roberts have moved into business such as underwriting and lending. The New York-based firm is set to launch its first hedge fund later this year after hiring a group of former Goldman Sachs Group Inc. managers led by Bob Howard.
KKR's public markets businesses, which includes its asset- management unit, accounted for about 4 percent of profit during the first six months. The private-markets unit, which includes private equity, also has some non-LBO efforts such as its oil and gas investments.
Apollo's buyout business contributed 76 percent of profit in the first six months. The New York-based company's capital markets investments, including hedge funds and distressed loan funds, delivered 24 percent, while the real estate segment reported a small loss.
Valuation on ENI
Private-equity firms and Wall Street analysts track profits using a measure called economic net income, which doesn't conform to generally accepted accounting principles. ENI doesn't include some costs, including non-cash charges tied to the firms conversions to public companies, that are counted in GAAP net income. It also includes the current value of unrealized investments.
Carlyle had ENI of $770.2 million the first six months, compared with $1.47 billion at Blackstone and $1.1 billion at KKR. Apollo reported ENI of $529.8 million in the first half.
Blackstone's market valuation of $13.5 billion is about 9.56 times its ENI in 2010, according to data compiled by Bloomberg. At the same multiple, Carlyle would be valued at $9.7 billion.
The companies' efforts to sell themselves to stock-market investors as broad-based asset managers have yet to deliver results. Blackstone, which completed its $4.8 billion IPO in June 2007, trades at 60 percent below its $31-a-share offering price.
Investment Results
KKR first filed for an IPO in July 2007, then ditched that offering in favor of a combination with its publicly traded European fund. The combined firm listed in New York in July 2010 and has gained 4.9 percent since. Apollo has fallen 36 percent since its IPO at the end of March.
Carlyle is touting investment results similar to those posted by Blackstone and KKR. Carlyle said its private-equity funds have delivered average annual returns of 31 percent since inception, according to the filing. That figure accounts for returns on realized and partially realized investments, the firm said. Its overall average annual return for the period was 27 percent. Blackstone has told investors its private-equity funds have an average annual return of 31 percent, and KKR's return was 26 percent. Apollo averaged a 39 percent return as of June 30.
To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net Cristina Alesci in New York at calesci2@bloomberg.net Beth Jinks in New York at bjinks1@bloomberg.net
To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net
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