(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, Sept 18 (Reuters Breakingviews) - Bill Conway’s
annual missive has gone missing. The January letters from the
Carlyle Group (CG.O) co-founder are eagerly anticipated,
especially after the 2007 edition foresaw a credit crisis. With
the buyout firm on something of a buying binge, Breakingviews
has drafted this year’s edition for him.
TO: All Investment Professionals, Carlyle Group
FROM: William E. Conway, Jr.
DATE: Sept. 18, 2012
You normally hear from me in January each year, but preparations
for our initial public offering in May and our accelerating deal
flow left me busier than usual. Though I conveyed some of my
views to you orally this spring, let me catch you up in writing
on the current market environment and what to expect.
Some five years ago, in anticipation of an end to an era of
excess liquidity, I urged you to play it safe. Then, it was
better to sacrifice higher returns in exchange for lower risk
and preserving the funds pledged by our investors, including
many of you. It is now my view that we can buy assets – even
compete for them – with somewhat less caution.
Our firm’s activity already reflects my outlook. Carlyle’s
$15.1 billion worth of deals announced so far this year is more
than Apollo (APO.N), Bain, Blackstone (BX.N) and KKR (KKR.N)
combined, according to Thomson Reuters data. That’s partly
because of our respective investment cycles and the large
distributions we have been able to make to our limited partners.
But beyond that you could say we are putting our money where my
mouth is. As it happens, some of our new public investors like
to see our funds put to work, too.
I am further encouraged that Ben Bernanke just told us money
will remain cheap until at least 2015. That fosters an
environment well-suited to Carlyle. As I told the Washington
Post recently, the average cost of borrowing for our last six
deals at the time was 6 percent. Detailed information from more
than 60 American portfolio companies, along with broader trends
like inexpensive energy, relatively more affordable domestic
labor and technological investment also give me renewed
confidence about U.S. growth.
Europe is still infected by fear but I see good contrarian
investment opportunities. And despite slowdowns in larger
emerging markets, there are many transactions worthy of our
consideration. It’s why in the last month we have announced the
acquisition of control in Brazilian furniture retailer Tok&Stok
and a $3.5 billion offer for Shanghai-based Focus Media Holding
Of course, there are always risks. In today’s market, we
must often use a higher percentage of equity than we have in the
past to satisfy lenders. As an industry, we are buying more
companies from each other, as Carlyle recently did with Getty
Images. Rival buyout firms have an extraordinary amount of
committed capital to deploy. All three phenomena can leave us
with less scope to make the high returns we strive for.
Dysfunction in Washington also means it isn’t exactly clear
how rules affecting private equity will change. The presidential
run of Mitt Romney is keeping our industry in the headlines,
generally not in a positive light. And public markets are
volatile, affecting both the cost of acquisitions and our
ability to exit on the terms we want.
These all present distinct challenges for Carlyle, but
unlike in 2007 it is not the time to play it completely safe. I
want you all to be optimistic – but you must still be prudent
with your choices and precise in your execution. Now more than
ever, our returns depend on it.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Carlyle Group said on Sept. 14 it had agreed to acquire
Landmark Aviation [LNDAV.UL] from GTCR and Platform Partners, a
day after it said it had acquired a 60 percent stake in
Tok&Stok, a Brazilian furniture retailer. Financial terms were
not disclosed for either deal.
- With $15.1 billion worth of deals announced so far this
year, Carlyle is top among its peers, according to Thomson
Reuters data. The private equity firm has announced nearly $40
billion of acquisitions since the start of 2008, also more than
any other firm in the industry.
- Washington Post interview with Bill Conway: link.reuters.com/bah72t
- Bill Conway’s 2007 letter: link.reuters.com/zyg72t
The Carlyle pop [ID:nL1E8G3622]
Time management [ID:nL1E8CBGRL]
- For previous columns by the author, Reuters customers
can click on [GOLDFARB/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS CARLYLE/
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