Frequently Asked Questions About
The Carlyle Group and Private Equity:
The Carlyle Group
- What is The Carlyle Group?
- Who owns The Carlyle Group?
- How is the firm structured?
- Who are your investors?
- How is Carlyle different from other private equity firms?
- Why doesn’t Carlyle publish detailed accounts of its funds’ performance? How about audited financials of The Carlyle Group itself?
- Who benefits from Carlyle’s investments?
The Private Equity Industry
- What is private equity?
- Who can invest with The Carlyle Group?
- What is a leveraged buyout?
- What is venture capital?
- What is leveraged finance?
- What's the difference between private equity funds and hedge funds?
- How does private equity change the short-term mindset and enhance growth?
- How do PE firms add value to companies they invest in and help them to improve performance?
- Are PE-owned companies more or less inclined to promote research and development?
- Why are the returns in private equity so high compared to the public markets?
The Carlyle Group
1. What is The Carlyle Group?
The Carlyle Group is a global private equity firm with $84.5 billion of assets under management committed to 64 funds as of March 31, 2009. Carlyle invests in buyouts, growth capital, real estate and leveraged finance in Africa, Asia, Australia, Europe, North America and South America focusing on aerospace & defense, automotive & transportation, consumer & retail, energy & power, financial services, healthcare, industrial, infrastructure, technology & business services and telecommunications & media. Since 1987, the firm has invested $55.7 billion of equity in 909 transactions for a total purchase price of approximately $227.5 billion. The Carlyle Group employs more than 890 people in 20 countries. In the aggregate, Carlyle portfolio companies have more than $109 billion in revenue and employ more than 415,000 people around the world.
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2. Who owns The Carlyle Group?
Carlyle is a private partnership, which means that it is owned by a group of individuals, most of whom are Managing Directors at Carlyle, and two institutional investors. CalPERS, the California Public Employees Retirement Systems, owns approximately 5 percent, and Mubadala Development Company, a strategic investment and development company headquartered in Abu Dhabi, owns 7.5 percent. The companies and real estate in which Carlyle invests are owned by the funds that made the investments.
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3. How is the firm structured?
Carlyle, with over 890 employees, is based in Washington, DC and has offices in 20 countries. Day to day management of the organization is conducted by its three Co-founders and Managing Directors, William E. Conway, Jr., Daniel A. D’Aniello and David M. Rubenstein. Carlyle has 100+ Managing Directors and 495+ investment professionals. One of the reasons Carlyle has a large staff is because many of the roles other private equity firms contract out are done in-house at Carlyle, including investor relations, accounting oversight, deal sourcing and due diligence and various back office duties.
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4. Who are your investors?
Carlyle's investors are public and private institutional investors and high net worth individuals. Carlyle does not disclose information about its investors.
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5. How is Carlyle different from other private equity firms?
Carlyle's global presence and local market knowledge sets us apart from other private equity firms. We have Global Vision : Local Insight - Global because Carlyle operates 64 funds in 20 countries; Local because our more than 495 investment professionals work in their home countries. Carlyle is also different because of its conservative investment philosophy; rather than swing for the fences with every investment, we strive for consistency, hitting singles, doubles, and triples with far fewer strike-outs. Carlyle investment professionals also invest their own money alongside our investors, so when we say we treat our investors' money like our own, we mean it.
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6. Why doesn’t Carlyle publish detailed accounts of its funds’ performance? How about audited financials of The Carlyle Group itself?
As a private partnership, Carlyle is not subject to the same disclosure rules as public companies. Nonetheless, this website contains a wealth of information about Carlyle, its investment professionals, investment approach, and portfolio companies.
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7. Who benefits from Carlyle’s investments?
Carlyle invests on behalf of public and private institutional investors and high net worth individuals. In many cases, our institutional investors are pension funds that represent state and city employees and workers at large corporations. Indirectly, millions of people are investors in Carlyle funds. We are proud of the fact that millions of people are able to benefit from the success of Carlyle’s investment activities.
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The Private Equity Industry
1. What is private equity?
Private equity encompasses many disciplines and derives from the practice of investing primarily private capital in primarily privately held companies, real estate or other assets.
PE firms establish funds that raise capital from investors – who are referred to as limited partners, or LPs. The private equity firms – known as general partners, or GPs – invest their own capital along with the capital raised from investors. With the combination of equity and the borrowed funds, the general partners buy companies that they believe could achieve significantly greater growth and profitability with the right infusion of talent and capital.
Private equity GPs typically hold companies for about three to seven years, and then sell them, hoping to realize a gain on the sale as a result of the increased value they have created for the portfolio companies during their period of ownership. If there are no profits, PE partners not only make no money, they lose their own equity investment.
The size of the capital gain directly relates to the increase in value the PE firm has created. Between 1991 and 2006, private equity firms worldwide returned more than $430 billion in profits to their investors, according to Private Equity Intelligence (London), 40% of which were public and private pension funds and foundations.
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2. Who can invest with The Carlyle Group?
Because of applicable U.S. securities laws, firms such as Carlyle work only with "accredited investors" and "qualified purchasers" as those terms are defined under the securities laws. These types of investors are highly sophisticated investors with considerable financial resources, such as high net worth individuals and institutional investors. Carlyle is prohibited from offering its products to the general public under applicable securities law regulations.
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3. What is a leveraged buyout?
Carlyle engages in management-led buyouts, which are the purchase of companies in cooperation with the current management. A combination of equity and debt is used for the typical transaction. The equity mostly comes from Carlyle’s various funds and other “co-investors” and the debt typically comes from major banks.
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4. What is growth capital?
Growth capital is money that invested in relatively mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a significant acquisition usually without a change of control of the business.
Companies that seek growth capital are likely to be more mature than venture capital funded companies, and they are able to generate revenue and operating profits but unable to generate sufficient cash to fund major expansions, acquisitions or other investments.
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5. What is leveraged finance?
Carlyle's high yield investments consist of structured vehicles known as Collateralized Debt Obligations (CDOs) that primarily invest in a portfolio of non-investment grade assets. An equity investment in the CDOs affords investors the opportunity to diversify their holdings and gain exposure to the high yield fixed income and leveraged bank loan markets.
Mezzanine is the level of securities that resides between common equity and senior debt and includes preferred stock and senior subordinated debt. Mezzanine investments have high risk adjusted returns with significant current income.
Distressed or "strategic" investments are made in the debt of operationally sound, financially distressed, U.S. middle market companies using a control-oriented strategy that focuses on the debt of smaller, less liquid issuers in industries in which Carlyle has demonstrated expertise. Distressed investing offers investors the opportunity to earn high, risk adjusted returns.
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6. What’s the difference between private equity funds and hedge funds?
Private equity seeks to create value over the long-term; hedge funds typically have a much shorter time horizon. Private equity funds typically buy and own whole companies and help them realize earnings growth over time. Private equity investors succeed only when the companies they own succeed. PE funds typically own companies in their portfolios for about three to seven years.
Hedge funds are pools of capital that usually invest in stocks, bonds, or commodities. Typically, they do not purchase a controlling interest in a company (although some may do so). Rather, they try to capitalize on short-term gains, using complicated trading strategies involving options and other derivative financial instruments. In some cases, hedge funds bet against the shares of companies they don’t own, hoping to profit from a falling price. The typical holding period for a hedge fund investment is weeks or months, not years.
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7. How does private equity change the short-term mindset and enhance growth?
It is important to understand one overarching truth about private equity: The entire investment hinges on improving the business and increasing its value. If the private equity firm fails to do that, it loses its own money, its investors lose their money, and its ability to raise future funds is undermined.
The essence of private equity is the alignment of the interests and incentives of the management with that of the owners. That is the reason why PE firms encourage or require its management to invest their own money into the company so they have a vested interest in its success.
Private equity also enables companies and the management to have a sharper focus on how capital is allocated across the business – without the constant pressure of delivering quarterly results to public shareholders. Shareholders and their company managers have a single objective: Grow the company’s value. Thus, they can make business decisions solely focused on that goal.
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8. How do PE firms add value to companies they invest in and help them to improve performance?
According to a 2007 study by Ernst & Young, two-thirds of the earnings growth (before taxes, interest and capital expense) at PE-owned portfolio companies came from business expansion, with organic revenue growth being the most significant element.
The PE firm must add new capabilities to the company it buys by adding new products, increase competitiveness by reducing waste and improving operations and grow revenues by entering new markets or finding new customers to make any money for itself or its investors. And it needs to develop, implement and successfully execute a compelling business strategy.
The best private equity firms today deliver deep expertise in the sector in which the investment is being made; a performance culture that rewards entrepreneurialism and results; managerial and functional capabilities (IT, for example); and an ownership structure that allows even the toughest decisions to be made quickly.
The Carlyle value-creation process often involves facilitating customer introductions and business alliances to increase the revenues of portfolio companies. Carlyle also helps portfolio companies identify opportunities that enable growth, such as strategic acquisitions and expansions, to enhance the value of its investments.
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9. Are PE-owned companies more or less inclined to promote research and development?
A study led by Professor Lerner of 5,000 U.S. transactions over a 25-year period, commissioned by the World Economic Forum, found that U.S. companies owned by private equity firms are significantly more likely to pursue economically important innovations than companies that are not owned by private equity investor.
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10. Why are the returns in private equity typically higher than the public markets?
In the world of investing, rates of returns correlate well with rates of risk: the greater the risk, the greater the return; the lower the risk, the lower the return. Private equity investments are among the most risky investments. Nonetheless, Carlyle is a conservative investor, which is why we have few “black holes or blow-ups,” which are large investments that fail.
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