Carlyle Will Join Financiers'
Moves Into Hedge Funds
JASON SINGER / Wall Street Journal 1aug2006
Carlyle - Here's a page on
Mindfully.org that runs a 54 minute Real Video film about the The
Carlyle Group. Or simply listen to the sound track of that
same video as an MP3
Carlyle Group is planning to start a hedge fund to trade stocks and bonds, in the latest move by private-equity firms to enter new businesses as their traditional way of investing struggles to keep pace with the billions of dollars pouring in from investors.
Carlyle is close to hiring Ralph Reynolds to lead the new unit, people familiar with the matter said. He is the global head of proprietary trading at Deutsche Bank AG in New York, which has one of the world's largest and most aggressive trading operations.
There has been a global rush of investment dollars into lightly regulated private partnerships such as private-equity firms and hedge funds. Private-equity firms use client funds to buy companies, take them private, restructure them, and sell them again, typically three to five years later. Hedge funds, by contrast, use clients' money to invest in a variety of securities and investments, frequently trading very actively and quickly in public markets.
Once a cottage industry, these private investment firms are now potent forces on Wall Street. Hedge funds alone manage more than $1.2 trillion and are responsible for the majority of stock trades on many days, while private-equity firms account for much of the global boom in mergers and acquisitions.
Firms like Carlyle are starting multiple private-equity funds to focus on a broad variety of countries and industries. Carlyle, based in Washington, D.C., manages a total of $41.9 billion in 42 individual funds, with focuses ranging from Japanese buyouts of big companies to a global energy fund. It is looking for as much as $1 billion to start a Middle East fund.
Carlyle is betting it can draw in even more money by offering hedge funds to its clients, as well. It isn't clear how much money Carlyle intends to raise for its new hedge-fund venture, but the fund is expected to amount to at least several billion dollars.
Mr. Reynolds referred calls to a Deutsche Bank spokeswoman, who declined to comment.
Other private-equity firms have ventured into the faster-paced world of hedge funds. Texas Pacific Group, for instance, in 2004 hired Dinakar Singh, previously Goldman Sachs Group Inc.'s head of in-house trading, to start its TPG-Axon Capital hedge fund. That fund now manages about $5.5 billion.
Some critics have questioned private-equity firms moving into trading publicly listed stocks and bonds because in the course of pursuing buyouts, private-equity executives often get access to nonpublic information. So-called due-diligence reviews of potential targets are required in almost all private-equity bids because the firms rely on borrowed money for a majority of their purchases, and lenders require access to such information.
While the private-equity firms that have set up hedge funds say they take pains to quarantine confidential information, executives pursuing buyouts often become industry experts with insights that can be used to trade in the public markets.
Texas Pacific Group founder David Bonderman said at a recent industry conference that his company's move to start a hedge fund was a way for the firm to find new uses for the "intellectual capital" gleaned from researching buyouts, such as buying and selling stock in other companies in the same industry as a company TPG was trying to acquire, without sharing any inside information.
Blackstone Group in April announced plans to start a hedge-fund business, hiring Manish Mittal from New York hedge fund Perry Capital to be chief investment officer. Announcing the move, Blackstone Chairman and Chief Executive Stephen Schwarzman said that Mr. Mittal's group would use "the shared knowledge of our various alternative asset-management businesses."
Blackstone already managed $13 billion in a fund-of-funds -- money placed in other hedge funds that Blackstone selects for clients.
Carlyle made a brief foray into hedge funds in 2001, hiring Afsaneh Beschloss, treasurer and chief investment officer of the World Bank, to build a fund-of-hedge-funds business to allocate money into many different hedge funds. But Carlyle sold the business to management just two years later.
Private-equity firms are getting "richer and smarter," according to a recent review of the industry by accounting and advisory firm PricewaterhouseCoopers. "As the big [private-equity] funds get bigger, their contacts and sophistication give them a leg up on creating value pretty much anywhere the opportunities are," the firm said in its review.
Carlyle has been one of the more controversial private-equity firms for employing former high-level government officials to advise the firm on strategy and offer insights into industries where government spending makes up most, if not all, customer orders, particularly the defense industry. The firm was long run by former Defense Secretary Frank Carlucci, and has employed former President George H.W. Bush and former Secretary of State James Baker, among others.
Carlyle currently is run by David Rubenstein, managing director and one of the co-founders, who was a deputy assistant to the president for domestic policy during the Carter administration. Carlyle's chairman is Louis Gerstner Jr., former chairman and chief executive of International Business Machines Corp.
The firm recently came under fire in the United Kingdom for its 2004 purchase from the government of about a third of QinetiQ Group PLC, the former research arm of the Ministry of Defense. Carlyle made nearly 10 times its £42.4 million ($79 million) investment when QinetiQ went public on the London Stock Exchange earlier this year, sparking criticism that the government sold the shares too cheaply to Carlyle, which until 2004 had former British Prime Minister John Major as its European chairman.
A person familiar with the situation said Carlyle was the highest bidder for the stake and added value by helping the company expand through acquisitions, particularly in the U.S.
Carlyle recently has been moving away from hiring former high-level government officials and instead has been building industry expertise in such areas as telecommunications and media. The firm recently hired Norman Pearlstine, former editor-in-chief of Time Warner Inc.'s Time division and a former managing editor of The Wall Street Journal, to be a senior adviser.
Mr. Reynolds currently runs the global proprietary-trading operation for Deutsche Bank, the department that makes bets with the bank's own funds in various financial markets. Although the Frankfurt-based bank doesn't disclose the amount of its own capital traded in-house, it has a reputation for having one of the bigger and more sophisticated trading operations on Wall Street, making bets on derivatives, stocks and bonds, among other financial instruments, and employing some of the financial world's top talent.